As the New Year unfolds, it is natural to ponder over the prospects for the New Year and the appropriate investment strategy to optimize returns from investment. So, what are the challenges and opportunities as we step into 2023?
As Mark Twain famously said, “prediction is difficult, particularly when it involves the future!” Unexpected developments, like the Russian invasion of Ukraine in February 2022, can trigger totally unexpected economic and market trends. So, barring such unforeseen events here’s my take on 2023.
Excessive volatility will continue in 2023
We had a ‘one-way Dalal Street’ from April 2020 to October 2021 which took the Nifty from the low of 7511 to the high of 18604. This rare one-way linear movement gave way to heightened volatility in 2022 when two to three percent up moves and down moves a day became common. Such violent moves happen when uncertainty is excessive. The Ukraine war, sharp spike in crude, natural gas, and food items and supply shocks triggered by China’s Zero Covid policy led to high inflation in the developed world and the consequent hawkish monetary stance from the leading central banks. Since the uncertainty surrounding these developments continues, the market is likely to remain volatile in 2023 too, at least in the early months.
Global economic slowdown will be a short-term negative
Global growth in 2023 will be much lower than in 2022. The three engines of global growth – the US, the Euro Zone and China – are slowing down. The Euro Zone is on the verge of recession; US is likely to tip into recession at least for a couple of quarters in 2023, and China’s growth is likely to be sharply lower at below 4 percent. The slowing global economy will impact global trade. This will impact India’s exports and consequently India’s growth rate too. India’s growth rate of 6.8 percent in FY23 is likely to slowdown to 6 percent in FY24.
Slowing global growth is unfavorable for equities. But markets have partly discounted the coming slowdown and, therefore, equity markets will trough out earlier than the economy.
US inflation and interest rates hold the key
The most important single factor that will impact global equity markets in 2023 will be the trends in US inflation and interest rates. The Fed has been aggressively tightening in 2022 and took a hawkish stance to contain inflation which touched 40-year highs. There are clear signals of inflation trending down. If this trend sustains, it is possible that the Fed might pause in early 2023 and then pivot towards the end of 2023. When the market signals such an outcome, a strong market rally is likely.
Multi-asset allocation should be the strategy
We are in a period of rising interest rates and bond yields. So, fixed income investment is becoming attractive. Therefore, investment in fixed income assets makes a lot of sense. Investment in debt funds is attractive since there is indexation benefit in debt funds. The post-tax return would be much higher than from bank deposits.
Investment in gold also is likely to generate good returns in 2023. Gold price movement is linked to the dollar. Continuous rate hikes by the Fed led to capital flows to the US and the dollar strengthened depressing gold. Now, it appears that the dollar has peaked and is trending down. Sustained downtrend in dollar will be triggered sometime in 2023 leading to up moves in gold. Therefore, investment in gold can be an integral part of the multi-asset investment strategy for 2023.
Buy on dips in installments
Since current valuations in India are high, the market is vulnerable to corrections when a sharp global correction happens. Such corrections will be good buying opportunity for long-term investors. Equity investment in 2023 will deliver superior returns beyond 2023. So, the investment horizon should be long, ideally for four years and above.