The countdown is now on for the new year as we soon wave goodbye to 2022. Another 12 months of abrupt twists and turns, and violent ups and downs for the stock market is almost at a close.
Few — if anyone — could have predicted the market-jolting events that transpired this year. Russia waging war on Ukraine, inflation reaching multi-decade highs across the developed world, interest rates rising at a record pace, geopolitical rumblings from China, and the passing of Her Majesty Queen Elizabeth II.
These events poured fuel on the fire of uncertainty burning away in the minds of investors in 2022. As a result, it's proven a difficult year with the S&P/ASX 200 Index (ASX: XJO) retracing 6.8% from where it started the calendar period, as pictured above.
Next year will likely be just as unpredictable, but here are my four key predictions for 2023…
What I'm expecting for the stock market in 2023
Before we get stuck into it, I want to make it clear that these are merely my thoughts on what could happen. No one holds a crystal ball and, truthfully, I have a strong displeasure for making short-term predictions — the world likes to make fools of fortune tellers.
So take these predictions with a grain of salt.
Interest rates will steady
In my opinion, the most important piece of data for next year will be inflation. It has dominated the headlines this year and it will take centre stage again throughout 2023.
The latest data from the Australian Bureau of Statistics has household inflation at 7.3%. Meanwhile, the Reserve Bank of Australia is targeting 2% to 3%. To me, this would suggest further increases from the 3.1% rate early in the year.
Westpac and ANZ currently hold the highest rate forecasts at 3.85% in May 2023. I tend to agree with these estimates. However, I believe interest rates will hold steady at this level with most mortgages rolling off of their ultra-low fixed rates by June.
Companies will prioritise cost cuts
I suspect 2023 will the year of cost cuts. This isn't exactly a bold prediction considering we've been seeing plenty of large companies already make substantial layoffs. Though, with interest rates staying high — stifling consumer demand — companies are likely to look inward to maintain profits.
But don't take my word for it. Go google 'cost cuts 2023' and you'll find some big-name companies anticipating the need for reduced expenses.
In terms of the stock market, listed businesses that are saddled up with lots of debt are going to be prone to the most drastic cuts. There is a chance investors will reward companies that were ahead of the curve — those that were running lean prior to the weaker environment.
Going private
2022 has seen its fair share of mergers and acquisitions. Although, private takeovers might be the flavour of 2023. I say this for three main reasons:
- Less focus on the share price, and more focus on operations during a potentially challenging time
- Private equity could be a source of cheap funding
- They remove the burden of reporting and ASX listing rules during a time when the usual benefit of a public listing (liquidity and easy access to capital) isn't as prevalent
I wouldn't be surprised to see some large ASX-listed shares opt for the quieter route if the market continues to struggle over the next 12 months.
Sideways grinding share market in 2023
Speaking of a struggling share market… my final prediction is that we'll see markets trade sideways for most of 2023. I'd be fine with being proven wrong if it's to the upside though!
But, in all seriousness, a sideways market can be a phenomenal opportunity to build positions in your highest conviction stocks. An investor's superpower is to think in timeframes longer than the average person.
My ultimate prediction is that anyone who dollar-cost averages into a diversified portfolio throughout 2023 will be glad they did in the long run.
