Mirror, mirror on the wall...what does 2023 have in store?

It is not surprising that for all investors, one of the possibilities for 2023 is a global recession. There has been a lot of talk about it in recent months.

Mike Coop, Chief Investment Officer for Morningstar Investment Management for Europe, the Middle-East & Africa, proposes that "as investors, the reality is that a recession appears the most likely scenario for many countries". At this stage the Reserve Bank of Australia is not predicting a recession in Australia, although it does anticipate a significant slowdown in economic growth next year.

Lukasz De Pourbaix, Chief Investment Officer at Lonsec investment Solutions feels that from an Australian perspective, the composition of our economy being heavy on energy and materials may offer a buffer to some degree from a deep recession. The best-case scenario is that if we do go into a technical recession, it will most likely be mild relative to other regions.

So, what should investors do in 2023?

Mike Coop says the fact is that every investor will endure multiple recessions in their lifetime and suggests to:

1. Revisit your goals and objectives including timeframes; and

2. Stay the course with a well-diversified portfolio.

In times of uncertainty, Coop says it is healthy to centre back on the truths of investing during a recession:

• To get investment returns, you need you to take risk – cash is unlikely to help you beat inflation and grow wealth over time.

• Recessions are common (occurring every seven to ten years on average), temporary (lasting several years) and eventually followed by economic recovery.

• Stocks tend to front-run the economy, not the other way around. They will also front-run the economy before the recovery happens. This makes market speculation incredibly difficult as you need to get two decisions right (exit point and re-entry point) amid heightened uncertainty. Very few, if any, have this skill.

• Stocks do have a track record of falling before and during recessions because company profits fall, and bankruptcies rise. However, they have always recovered lost ground in the years that follow.

As most investors have a long-term timeframe, Morningstar’s head of US economic research, Preston Caldwell, says investors need to look beyond 2023 with growth expected to "accelerate again in 2024 as the Federal Reserve lifts off the brakes.".

As always, if your investment objectives or timeframe have changed or you have concerns, please contact our team on 4688 8000 or email stan@magnifywealth.com.au.

Sources:

Investing during an economic downturn, Fernando Luque, 12 December 2022.

Investment Outlook Report, Lonsec, September 2022 (not publicly available).