What will 2023 be like for... investments?

Published on: 21 December 2022

Historic labor market tightness, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year economically. But what will 2023 bring us? In this series, Charles Kalshoven, macroeconomist and senior strategist at APG, explains what we can expect next year in terms of our purchasing power, the labor market and the housing market, among other things. Today part 4 (final): What 2023 will be like for investments?

Kalshoven does not want us to call this investment advice. That would have to be tailored to someone’s individual situation, which is not possible in an interview. But he can talk about possible changes in the world of investing. This year, for example, both stocks and bonds went down. “In a traditional portfolio, which is split between stocks and bonds, the idea is that when the economy is bad the bonds will do well.” That did not hold true this year, as central banks sought to combat unexpected inflation and raised interest rates. “That is directly bad for the value of bonds and indirectly bad for equities, as growth expectations decline.”


Because stock prices have fallen significantly since the beginning of the year, but corporate profits still look good, equity valuations are now lower. On that basis, expected medium-term returns have improved compared to last year, Kalshoven says. “With that said, I would note that 2023 is the year when many countries will face a recession, and that development does not seem to be fully reflected in stock prices yet.” Perhaps it will be a shallow recession with little impact on corporate profitability, but it could also lead to a self-reinforcing mechanism, the strategist said. “Suppose the economy and corporate sales fall by 1 percent - a mild recession - corporate profits will fall much harder than by that one percent. This is because companies have fixed costs, so their profits fall harder. Then the ratio of prices to profits will look a lot more unfavorable again. And a recession brings uncertainty, so investors want to be better rewarded for risk. In other words, then stock prices can take a hit.”

Can anything be said about stock returns in 2023? According to Kalshoven, stock prices are far too volatile to make statements about precise returns within a single calendar year. Moreover, it is important not to focus on a single year. “What the stock price does today or tomorrow is mere speculation. Over longer horizons, however, you can expect a certain return based on fundamental factors. Long-term investing is also not without risk, but it is one for which - on average - you are rewarded. So, rather than avoiding risks, you should diversify your portfolio. That continues to make sense, even in 2023.” And that diversification can be done in several ways. “Research shows that just a few stocks are responsible for most of the returns in the stock market. If you invest in a wide range of stocks, there is a good chance that the good stocks are among them. In addition, it is not only wise to diversify your assets over several stocks, but also over bonds and commodities, for example. Then your invested capital will be more resistant to different economic scenarios, such as the high, unexpected inflation this year or a recession next year.”

Diversification does not have to be only about financial investments

Diversifying over time
In addition to diversifying across breadth, it is possible to diversify over time. Even 2023 will have periods when stock prices rise and periods when they fall. Kalshoven: “Especially if you are in the accumulation phase of your portfolio and you set aside money every month or quarter, sometimes you will buy stocks when they are expensive, and sometimes when they are cheap. But because your purchases are spread out over time, the biggest outliers are averaged out.” This is also where so-called rebalancing comes into play, Kalshoven explains. “When you invest, your investment strategy is important. In it, based on your investment horizon and risk profile, among other things, you choose a certain percentage of stocks, bonds, commodities and cash, for example. Those categories book different returns, so you slowly drift away from the portfolio breakdown you had set out in your strategy.” To get back to that, you sell some of the categories that have done well, and buy in from those that have done poorly. “In the long run, that improves your risk-return profile. It makes sense to do that rebalancing at least once a year. The Christmas holidays might be a good opportunity for that.” 

Diversification does not have to be only about financial investments. “Actually, you have to look very broadly: the house you own is also part of your assets. Because of that consideration in real estate, you no longer need to invest extensively in real estate funds in the stock markets. What you can do next year is invest in solar panels or insulation material, for example. This will help you reduce your energy bill. And it can be seen as a form of green investment.” Your “human capital” - future labor income - can also be seen as part of your total assets. You can boost that by investing in your skills. “Maybe you can improve those by investing in an education that increases your chances in the job market. That too is a form of return.”


Then there are the tax changes in 2023 that affect investments. “Next year, the Tax Department will assume a 0.3 percent return on savings and 6.18 percent on investments. On that 6.18 percent return, you pay 31 percent tax this year and 32 percent next year. That’s quite a lot, and it is also definitely something to consider.” Still, according to Kalshoven, don’t let this tax rate influence you too much. “In the long run, even after taxes, you can expect to make more returns with investments than with savings. And you can come up with all kinds of tricks to make the ‘investing’ box optically smaller - for example, by choosing more risky instruments like stock options instead of stocks - but that probably only distracts from your long-term strategy. For many people, incidentally, the tax will not apply, because in 2023 you pay no tax on the first 57,000 euros or - for tax partners - 114,000 euros of equity in box 3.”