Six Things Kiwi Investors Should Consider When Making Investment Decisions In The New Financial Year

The start of 2023 has been shaped by rising inflation, a cost-of-living crisis, extreme weather events and the post COVID hangover still lurking in the background. However, the economic outlook for the financial year may not be quite as gloomy as it might appear, according to global professional services firm, Mercer.

"While developed market economies will likely continue to weaken over the coming year, we should also remember that price pressures that have plagued markets and economies over the past year are beginning to fade," says Mercer New Zealand Chief Executive Officer, Martin Lewington.

Mr Lewington says that while the recent significant lows in New Zealand business confidence, labour markets, and the unknown human, economic, and environmental impacts from Cyclone Gabrielle cannot be ignored, investors will be looking to a wider range of considerations over longer time horizons.

“After a number of years of strong returns, New Zealand investors are now facing a more challenging market environment and the need to keep on top of a broad range of global considerations," says Mr Lewington.

"Market volatility in the post-pandemic period, international conflict, climate realities, central banks globally tightening belts and supply chain disruptions have all proved to be challenges for the majority of asset classes over the past year."

However, in the 2023 financial year, investors may see more attractive valuations across the board, says Mr Lewington.

Six things investors should consider when making investment decisions in 2023

1. The global economy is bending, but not breaking.

Globally, it is unlikely that we will enter a deep recession, however it is likely that there will be some countries that do better than others. The US is likely past the peak in headline inflation. The UK is witnessing both significant wage growth pressures and increased energy costs, which have culminated in double digit inflation. Meanwhile, Japan has experienced lower inflationary pressures thus far, but as restrictions ease, there may be an increase though it's unlikely to reach the same extent as other developed markets.

While in New Zealand, inflation may also have peaked, it is still well above the RBNZ target band of 1-3%, so further tightening is likely – particularly if the impact of recent storms and rebuild results in sustained inflation. Household spending and growth will likely slow as we see the impact of higher mortgage rates flow through. 
 

1. Inflation is peaking, but not disappearing altogether.

We expect global annual inflation rates to fall in 2023, but remain above 2%.

NZ CPI increase for the 2022 year was 7.2%, with the largest contributors stemmed from rising prices for both constructing and renting housing according to Stats NZ.

1. Central banks can be expected to pause their tightening campaigns to mid-2023.

Such a pause would be to assess the impacts of recent policy changes. We do not expect aggressive action, unless prompted by unexpected inflationary surprises.

In New Zealand, the RBNZ is forecasting further hikes, with the rate peaking at 5.4% (vs. the current rate of 4.25%), and for the rate to stay above 5% over 2023.

1. Geopolitical concerns show little signs of abating.

We expect that conflicts in Eastern Europe, China's position on Taiwan and ongoing tensions with Iran will continue to impact economies and markets. While there are large question marks hanging over China's economic and regulatory environment, we believe that perceived resolutions of one or more of the current uncertainties could provide significant tailwinds to the markets.

1. The US dollar is significantly overvalued and should weaken longer term.

However, the immediate outlook remains unclear. Those investors with longer investment time horizons may look to other currencies such as the euro and the yen, due to their competitive valuations.

1. Corporate bonds now look attractively priced and defaults and downgrades appear to be contained.

At the same time, sovereign bonds appear to have opportunities, as do equities, where reasonable valuations must be balanced against optimistic earnings expectations and higher discount rates.

The attached report published by Mercer, Economic and market outlook 2023, offers investors further detail and guidance.

https://img.scoop.co.nz/media/pdfs/2304/Mercer_Economic_and_market_outlook_2023.pdf

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