The five theatres of interest I’m watching next year
Is 2023 going to be a good year or nah?
Personally, I’m bullish. I think the stars are aligning for a good one.
But these are still unusual times. We’re still in uncharted waters. And there’s the fair share of risks around.
But let me step through the key theatres of interest next year, and compare the bull and the bear cases, so you can decide for yourself how good a year you think its going to be.
Theatre 1: Inflation
This is still the main game in town. We’ve got meaningful inflation for the first time in a generation, and central banks are still scrambling to respond.
The bull-case – and my personal sense – is that inflation has peaked. Inflation has been driven by supply chain bottlenecks, and they seem to be easing (container shipping rates, for example) have come off, and that should feed through into lower prices in time.
The bear case is that inflation is sticky, and that the batton will be passed from supply-shocks to wages pressure. There is no real evidence of that.. yet. But bears might tell you its coming.
Theatre 2: Growth
With central banks hiking rates hard, they’re trying to take heat out of economy, and thereby, inflation.
The danger is they hike too hard – or are forced to hike to hard thanks to persistent inflation – and we end up in recession.
So far the growth numbers are holding up, but growth is narrowly based – in Australia its almost entirely about consumer spending.
My sense is that there enough of a savings warchest to help consumers weather the rate-hike storm, especially with such a strong labour market behind them. And that should be enough to keep the economy from stalling. That’s the bull-case.
The bear case is that the consumer will collapse like a house of cards as rate pain really starts to bite, and the economy will keel over as a result. This is the bear-case, and it’s not what I expect, but it is possible.
Theatre 3: Interest Rates
With inflation peaking and growth clearly slowing, my sense is that the RBA will be happy to draw a line under eight consecutive rate hikes and take a pause at their next meeting in February.
We might get another one or two hikes through the first half of the year, but I reckon we’re pretty close to the top. That’s the bull-case.
The bear-case is that inflation is sticky, and the RBA is forced to rate hikes, even into a recession, in order to break the back of inflation. Again, that’s possible.
Theatre 4: House Prices
House prices have fallen substantially already. Corelogic data for November showed that the 5-Capital median was down 7.6%.
That said, given prices were up 30-odd percent through the pandemic, a consolidation like that was always to be expected.
For the moment, the housing fundamentals remain very strong. Rents are growing north of 10% a year, and there remains a shortage of stock on the market. As the labour market supports household incomes, and as the rate cycle turns, that should see prices find a floor and start to head north again.
That’d be my expectation.
The bear case is that the labour market deteriorates, and the rate hikes we have already seen become too much for some people, and we see a number of forced sales come on to the market, depressing prices.
We haven’t seen any evidence of this so far, and my sense is that you’d need a really deep and protracted recession to topple the housing market. It’s just not likely.
Theatre 5: Global Risks
It’s easy for bears to point to risks to the global outlook. The war in Ukraine could take a turn for the worse (it could literally go nuclear.) China is also struggling with their zero-Covid policy, and there have even been rare signs of political unrest.
Energy prices could also take a leg higher and be a major headwind for global growth.
That said, there are always dark clouds on the economic horizon, and most of them never come to pass.
And my sense is that a lot of them are priced in already. If the war in Ukraine gets worse, it’s not really going to be that much of a surprise.
Putting it all together…
In sum, it seems to me like we’ve done well to manage a fairly orderly transition from the Covid growth spurt to consolidation and the normalisation of prices.
It could have gone badly.
But it hasn’t. We’ve had pretty much a full year of central banks around the world raising rates and a clear change of direction in fiscal policy.
So far, nothing has broken.
And I think that speaks to how solid economic fundamentals were coming into the turn.
And my sense that if things haven’t broken by now, they’re probably not going to.
And that’s why I see a lot of upside potential in 2023.
It will be a year of rebound in asset prices, and in housing in particular.
But then again, there’s good money to be made in any market.
JG.
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