Investing is a game of probability, not certainty.

Nothing is ever guaranteed. Unknown unknowns lurk around every corner, and the game is always changing.

However, while you will never be able to predict exactly what’s going to happen in the future, current data does shine a light on what lies ahead for markets in 2023.

Here is my summarised view on the most probable direction for markets in 2023 and how to position your portfolio accordingly.

Inflation vs. recession

In my view, an overly aggressive Central Bank policy will lead to a painful period for stocks as company earnings and nominal growth falls, bringing the US into recession. This will force a necessary pivot from the Central Banks, creating buying opportunities in equities that will have already front-run the economic contraction ahead.

Stocks

As with 2022, stocks which provide an attractive income appear more reasonably valued. Investors remain less likely to fund the growth story of pre-earnings companies as a potential recession looms.

Any overall underweight to stocks in the first half of the year with a material tilt towards companies with strong and stable balance sheets should provide portfolio resilience.

More specifically, financials (Net Interest Margin improvement and balance sheet strength) and healthcare (ageing population demographics) are preferred from a sector standpoint.Bonds

The brutal repricing that came as a result of the Federal Reserve’s efforts to tame the inflation beast have brought short term treasuries back to between 4% and 5%.
For the first time in a long time, the rotation into bonds is an attractive trade. For risk-averse savers, this is a game changer as the endless search for yield is over.

I have increased my allocation to short-term Government bonds given the current interest rates on offer and uncertainties elsewhere.Real Estate

The ripple of weaker housing activity has already begun.
In the US existing home sales have dropped dramatically with November clocking the worst decline since February 2008 - down 28.4%.

This is hardly surprising given that we condensed 10-years of growth into an 18-month period as house prices jumped 40% since 2020.

While I believe there is more downside in the real estate market (~10%) as a result of the higher mortgage rate environment, the overwhelming lack of supply remains the most supportive factor. We simply didn’t build enough homes following the last housing crash to meet the demand coming from millennials reaching their household formation years.

This generational undersupply means ludicrous prices are here to stay, but the price surges we have experienced in recent years are over.What does all this mean for you?

It’s not all bad news. Valuations are in a much stronger position relative to this time last year. Once the earnings decline is fully reflected, long-term opportunities will emerge for those ready and willing to put their money on the table.

Until then, tactically chose a combination of short-term bonds and defensive equity sectors that can survive a challenging economic environment while still providing income to your portfolios. Brighter days are ahead, just not quite yet.

Now is the perfect time to set up your strategic long-term investment plan. Don't wait until the market has moved to think about your investments.

For those looking for independent investment consulting advice, please don’t hesitate to reach out.

Find my full list of 2023 predications on my website by scanning the QR code above.