War in Europe, inflation and interest rate rises, banks collapsing and market volatility continuing. What’s next, ask many investors.

Times of turmoil are when investors tend to seek more external advice than usual and it is when financial advice can add even greater value to clients.

The good news is investment analysts remain quietly confident about the prospects for a better 2023, despite a rocky couple of months which have taken the shine off January’s strong start to the year.

The key is to look for quality assets as an extra defence against the potential for deeper economic slowdowns than many pundits predict. This is particularly true after a banking crisis that roiled global markets and dented confidence in the sector.

What should advisers suggest?

The remainder of the first half of the year was forecast to include continuing rate rises in the United States and Australia. However, that was before Silicon Valley Bank’s collapse sparked a broader crisis that ultimately ensnared Swiss banking giant Credit Suisse. 

Much is being discussed and written about the impact of the crisis across both fixed income and equity, as well as private markets.

Everyone in the market is looking for the next signals and potentially will react to them. A key, obviously, is for advisers and their clients to take a long-term view to investing. 

Kerry Craig, Executive Director at J.P. Morgan Asset Management, says investors with a 12 to 24 month horizon, can capitalise on opportunities in both equities and fixed income that exist after a difficult 2022 in which both asset classes fell.

“The outlook for the economy is going to be tested, with a strong case for a US recession and much more muted growth in Australia, but better prospects in both China and Europe,” Craig told a recent AUSIEX client webinar.

“While the outlook for equities remains uncertain in the short term, medium term valuations are much more compelling. Quality is key because of the risks to both economic and earnings growth, and while expectations for centrals banks to hike rates are much lower, they can still get it wrong.” Craig says.

Global opportunities beckon

In terms of shares, that means maintaining a focus on companies with reliable earnings and diversifying global portfolios across a broader range of markets to mitigate against a potential US recession. China’s reopening is likely to spur its growth and the flow on effect to other Asian markets will provide another avenue for diversification, particularly due to a weakening US dollar.

“Europe is also looking better than forecast because mild weather meant its energy crisis wasn’t as bad as forecast. It was also able to diversify its energy sources as a result of China’s lockdown and may now record a small expansion instead of a recession,” Craig says.

Quality is equally key to fixed interest in the current environment, with J.P. Morgan Asset Management highlighting that investors consider adding duration to a portfolio and focus on the safer end of the credit market. 

Craig points out the yield on 10-year Australian government bonds is close to 4% and investment grade US bonds are yielding around 5%, which is a “very compelling risk return trade-off should economies slow. While bond yields have fallen from their recent highs, they are still well above where they have been for many years and look compelling given the risk return trade-off should economic activity slow” Craig says.

With increased and continuing uncertainty, it’s worth advisers reiterating to clients that listed assets can be moved into and out of quickly. 

Local outlook

An underwhelming earnings season for Australian companies underscored the need to apply a quality filter to local stocks as much as their global counterparts. Cost pressures resulted in a number of companies missing expectations across sectors, and there remains some caution in outlook statements given the unknown path for interest rates and inflation.

The Australian Fund Manager of the Year for 2022, Ausbil Investment Management, noted that local companies reported a slightly disappointing season relative to expectations, with half year earnings falling 2.2% in nominal terms relative to the same period last year. This was due to a combination of factors including lower commodity prices, higher interest rates and inflationary pressures impacting cost growth.

Looking forward, earnings per share revisions (EPS) for the market have turned negative for both financial year 2023 and financial year 2024, and the growth outlook, while positive has softened. Consensus expectations for earnings growth for the S&P/ASX200 Index are now +5.0% for financial year 2023 and +3.0% for financial year 2024.

There were positive EPS revisions for several sectors, including online services, diversified financials, biotech, infrastructure, and utilities. 

Looking ahead, Ausbil likes critical metals and commodities for the long rotation from fossil fuels to renewables in the great decarbonisation and the electrification-of-things.

Last word

The market outlook for this year remains better than 2022 for patient investors who conduct proper due diligence before purchasing assets. However, many questions remain to be answered, not least of which is the interest rate outlook.

A cautious approach may well be rewarded more than other in an environment in which the potential for an economic slowdown looms large.