MARKET COMMENTARY – December 2022
2022 Year in Review
The ASX200 recorded a fall of 5.45% for the year closing at 7,039. The bear market was characterised by frequent hopeful rallies on any sign of changing prospects or sentiment. The market sectors of Tech, Real Estate and Consumer Discretionary being the most out of favour while defensive asset sectors of Utilities and Energy outperforming.
2022 was a year defined by Global inflation dominating all economic concerns. A key factor driving inflation remains Covid-19, intensified by the Russian invasion of Ukraine, in a highly connected globalised economy. Covid-19 generates inflation though companies struggling to keep staff healthy to produce the goods we purchase. The result is an imbalance in supply and demand, in this case a shortfall in supply and stable demand pushing prices higher as we outbid each other for scarce goods from cars to computers. The persisting inflation prompted Central Banks to embark on one of the most aggressive rate hiking cycles on record in an attempt to control inflation.
The market persisted in not listening to Central Bank commentary about the future of interest rates. With each news release proclaiming interest rates to be higher for longer and the market interpreting any softening in growth or inflation as a ‘pivot’ moment to invest in higher risk assets.
2023 Forecasts
2023 brings a market environment dominated by central bank interest rate increases. The Australian economy faces a raft of challenges including shifting Chinese policy, a falling housing market, household saving returning to pre-covid levels and policy lag among others. How these factors are navigated will have a large impact on market outcomes. The central element of interest rate rises is causing credit to become more expensive and harder to obtain and is likely to dampen company earnings, increasing market volatility which supports a conservative approach to portfolios. However, the good news is with the return of historically more normal interest rates, fixed interest investments have become viable alternatives to equity exposure.
Limberg Asset Management
In the current market we will continue to focus on asset allocation in portfolios. For equity investments the emphasis is on company balance sheets and cashflow generation in selecting companies for portfolio inclusion. In portfolios, should the businesses prove to be of sufficient quality, this will result in a gradual accumulation strategy to reach a desired weighting. Pleasingly the defensive fixed income component of portfolios has picked up with interest rate movements and continues to generate cash at increased rates.
We wish you all a happy and healthy 2023 and thank you for your enduring trust and continued support. Should you have any question with respect to your portfolio please do not hesitate to contact us.