It has been a rough year in 2022. At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is down by 9%. But, I'm going to tell you about one fund manager's view that 2023 could be a good year for the ASX share market.
Fund manager Isaac Poole from Oreana Financial Services wrote on Livewire that a shift to a pause in interest rate rises from the Reserve Bank of Australia (RBA) and the United States Federal Reserve would mean there was a "resetting of the bearish recession expectations. And that will deliver considerable upside to Australian equity markets through 2023".
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Economic views
It is Oreana and Poole's view that a modestly restrictive cash rate by the RBA will push house prices lower, but they may not fall as much as 20%, as some are predicting.
The expert's view is that higher interest rates will:
… restrict housing activity, house prices, household spending, and household borrowing. And that will bring down inflation, allowing the RBA to hike less than the market expects. And allow house prices to decline less than consensus expects – we think 10% is probable.
If house prices only fall by 10%, this won't lead to a recession in Oreana's view. It would be a "welcome cooling" and the RBA can say it did a good job. This could also help assets like ASX shares.
Poole went on to say:
The RBA has taken rates close to neutral, but they are not yet restrictive. When the RBA does move to restrictive policy settings, we expect to see the economy slow to below-trend growth rates. The unemployment rate will initially stop falling and judging by the rapid cooling in ANZ job ads, the unemployment rate will move higher. Modestly higher unemployment will reinforce the RBA's pause and extend the cycle, delaying recession for some time.
When will the RBA stop increasing interest rates?
Poole pointed out that the RBA hurt its creditability by saying that interest rates weren't likely to rise until 2024.
But, after the recent pivot in policy, the RBA interest rate is now "moving towards restrictive monetary policy".
Poole wrote:
We expect the RBA will pause at modestly restrictive settings, allowing the Australian economic cycle to extend through 2023.
Australian house prices are going to correct but not collapse in this environment. Importantly, solid economic momentum can prolong the economic cycle through 2023 preventing a recessionary environment. And in this scenario, Australian investors will benefit from exposure to both Australian equities and Australian government bonds.
The end of uncertainty for the market about how high interest rates will go could be a positive factor for the ASX share market. However, I think it's worth pointing out there's no knowing what rate the RBA interest rate will settle at for the longer term, which does have an influence on the valuation for ASX shares.
