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.”