10 things investors need to watch in 2023

2022 was a great year for Indian financial markets as infections abated, vaccinations and boosters picked up and pent-up demand fueled economic growth. As restrictions eased, excess money swirling in the system sparked decades-high inflation with the Indian markets too caving towards the end of the year. So, what will the next year hold?

Here are ten things to look out for in 2023:

Cooling markets and recession

As rate hikes begin to take effect, worldwide financial markets can revert to mean correlations and returns i.e., behave as expected without stocks, bonds and commodities all crashing together. However, stock markets have all but priced this into existing valuations, limiting the potential for a future rout.

Attractive valuations

Valuations and consequently prices have crashed through 2022 on the back of central bankers raising rates to tame inflation. This itself lends well to attractive entry points and resetting strategies or even rebalancing portfolios. Bonds might be attractive for a bit as well.

Interest rate hikes

“Central banks in Australia, Norway, Sweden, Switzerland, and Canada have all moved to a slower pace of tightening. The Fed will follow suit to assess the effects of its tightening cycle—higher rates impact the economy with a lag,” said a J P Morgan 2023 outlook report. So, can one expect slowing or complete stoppage in interest rate hikes as inflation cools? Maybe not! With the ‘Special Military Operation” continuing in Ukraine, slowed activity in construction, housing markets cooling off, it will take a little more time for the growth engine to restart.

China

While reeling under a property collapse and protesting lockdowns Covid-Zero was eased, and China is now in the middle of another Covid wave. While not affecting materially, it will cause a disruption which would indicate a slow recovery in 2023. This could lead to a more prevalent China+1 manufacturing strategy. Covid induced backlog is clearing as shipping costs have crashed 70% from peaks. Notwithstanding import restrictions, the general availability of imported goods could ease. While commodity prices are down, Indians are unlikely to see cheaper imports, but that will provide an impetus for Make in India.

Weaker rupee

The Indian rupee has faced a rout despite stock market performance and a sharply decreasing cost of the crude basket. However, as a result, there are sanctioned monies more than $20 billion. According to Commerce Ministry figures, “India’s total trade with Russia stood at $8.141 billion in 2020-21. During April-February period of 2021-22, the trade value went up by 45.79% to $11.869 billion”. All this must go back at some point and might put pressure on the rupee.

Better jobs outlook

As startups crater and lay off thousands, a more rational cost of resources is expected to prevail in the next year leading to better-managed companies snapping up this experienced workforce resulting in a healthy job market. Globally the reverse could be true as labour demand cools off.

Exchange Traded Funds (ETFs)

For active managers, 2023 in all likelihood will be less than ideal to generate excess returns and as asset managers scramble to shore up bottom lines, we are likely to see a slew of domestic ETF launches both vanilla and tad exotic ‘smart Beta’ like ESG. Climate change is a worry and an opportunity. Even as “Greenwashing” takes centre stage in regulations, ESG will continue to prosper with many such funds launched in the ETF format.

Security & AI

ChatGPT demonstrated the potential of AI as much as the Ukraine war and the AIIMS attack stressed the need for national cyber defence. Going into the year we are seeing a merger of the two into powerful hacking countermeasures. Investment is rising and while there are not too many public companies doing this work, we will likely see Big Tech increasing investment in security with uses as wide as fighting climate change to remote attack drones.

Rebalancing portfolio

Some key takeaways for Indian investors remain to hold their allocation and rebalance at appropriate intervals to benefit from residual volatility.

Overseas opportunities

Diversifying overseas remains a good strategy though one should approach China and Europe with some caution. For the rest of the regions across the world, entry points look interesting.

Diversification

Low cost will be the king and therefore it is useful to understand the role ETFs play in portfolios.

With that note, please consult a for-fee SEBI-registered professional advisor. I wish all my readers happy holidays. Wash up, mask Up and maintain distance and vaccinate.

(The author is Partner at Infinity Alternatives. Twitter handle: @anubhavary)