Predictions for 2023

Hi all, Merry Christmas and a Happy New Year to you when it comes! We actually call New Year’s Eve “Hogmanay” in Scotland.

The Mrs and I don’t plan on doing much this year - probably sit and have a glass of wine with the log burner on. I am not a big fan of the festive season to be fair - the British weather is terrible at this time of year so I mainly end up being cooped up in the house whilst eating / drinking too much.

Anyway, back to the purpose of this blog post and don’t worry, this has not replaced my monthly update - I will post that either later today or tomorrow.

This post is about predictions for 2023. I thought it would be fun to pull this together so that we can look back on it and see how far off the mark I was.

Inflation

The first prediction is in relation to inflation and where I expect it will be.

In 2022, we have seen rampant inflation across the globe. In the UK, the CPI inflation rate reached 11.1% in October and has fallen slightly to 10.7% in November.

This spike in inflation has brought the “cost of living crisis” which has seen households across the globe really struggle.

So do I expect inflation to continue to be very high? My prediction is that inflation will likely fall sharply in 2023 mainly due to the tightening of monetary policy that we are seeing from central banks across the globe. Leading indicators also suggest that inflation will likely come down.

My prediction is that inflation is below 4% in 2023.

Recession

My second prediction relates to whether we will see a recession or not.

This is potentially an unfair one because really you could argue that we are already in a recession. I posted a blog back in July that discussed “how to predict a recession” - I have been expecting a recession since about March due to the yield curve flattening and then inverting.

So the short answer is that I predict a recession in 2023.

I think how severe this recession is really depends on how long central banks - particularly the Federal Reserve - keep monetary policy tight for. The resurgence of China from COVID lockdowns could also stop a global recession from being too severe.

Personally, I think the green light for the recession being over will be when the central banks start stimulating again - dropping interest rates, stopping quantitative tightening and potentially starting quantitative easing. At this moment in time, central banks are still very restrictive and I suspect the economy likely has some more pain to come in the short term.

Asset prices

Next up is asset prices. OK, so if we go for the following asset prices - Stocks, Government Bonds, Real Estate, Commodities and Cryptocurrency.

I expect next year, inflation will drop and those assets have performed badly this year will likely outperform next year.

Stocks

Even though I expect more pain in the short term for stocks, there has already been quite a lot of damage done. I expect the first half of the year may not be great for stocks but that the global stock market will end up slightly positive for 2023.

In terms of best performing sector, I would expect technology to re-bound best as this sector has been the worst hit in 2022 - particularly high growth technology. I like my biggest active fund holding Scottish Mortgage Investment Trust at these levels.

Government Bonds

Government bonds have seen one of their worst sell offs ever. Again, with inflation falling and a lot of uncertainty overhanging the economy as we start the year, I would expect government bonds to perform well in 2023.

This also therefore means that I expect interest rates to fall in 2023.

Real Estate

Real estate has held up pretty well considering other asset classes have fallen and the cost of living crisis / high interest rate environment. I expect that real estate will not perform as well in 2023. I think the high interest rates will mean house prices particularly are not affordable and prices will come down.

Commodities

Since inflation is starting to come down, I expect commodities will have a bad year in 2023. However, with China re-opening from COVID lockdowns, this has the potential to offset this slightly.

Cryptocurrency

Similar to stocks, I expect cryptocurrency may have a difficult first half but will perform well in 2023.

Cryptocurrency has seen a pretty ugly sell off in 2022 but the next bitcoin halving is fast approaching alongside the potential for central banks to start easing - I think this will likely end up being a catalyst in the second half of the year.

Best and Worst Performing Asset Class

I think the best performing asset class will be cryptocurrency and the worst performing asset class will be real estate.

Overall, I think 2023 will be a great opportunity for investors who are willing to take the risk. Most will be paralysed by the fear in the markets - don’t be one of those guys.