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F Palmer & ME Palmer
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Investment & Economic Review January 2023

16 Jan 2023

2022 was a momentous year for Joseph Palmer & Sons, as we celebrated our 150th year, moved office, and contended with elevated financial market volatility and a rapid increase in interest rates. Thankfully some of the market and economic obstacles – notably inflation and supply chain disruptions – had begun to ease by year-end such that the outlook for 2023 is beset by fewer uncertainties.

A key feature of 2022 was the rapid rise in interest rates, the Reserve Bank of Australia (RBA) having raised its reference rate in eight successive months. The purpose of this aggressive policy tightening is to dampen consumer and business demand, and thereby help arrest spiraling consumer price inflation.  Indubitably this will happen, so a slowdown in economic activity is regrettable but inevitable, the question of course is by how much.

An unfortunate trend of late is breathless hyperbole and exaggeration in media reporting. Presumably sensationalism and tagging everything as ‘breaking news’ is deemed strategically necessary for media outlets’ self-interest. Anyway, there’ll be lots of dramatic reporting about forthcoming recessions, financial calamities, and any number of topics of woe in 2023, much of which should be considered with discretion. Yes, there will be a slowdown because of higher interest rates, and yes there is the other side of the money printing/government debt hill to navigate. But there is good news too – employment is strong, wages are increasing, household wealth is high and our agricultural and mining industries are underpinning a strong terms-of-trade position. We encourage clients and investors to be pragmatic when assessing the future, as we are, and have reasonable regard to all relevant factors.  

One lingering area of uncertainty is the war in Ukraine, which we hope ends soon for the sake of the suffering of the disaffected people.

Assuming no major extraneous events, our outlook for 2023 includes an expectation of further volatility in share markets (but no significant or lasting decline), some further modest rises in interest rates, but a pause by mid-year, and some oversupply pressures in commercial and residential real estate.  2022 had many political events (including the Australian election, US mid-terms and the Chinese 20th National Congress), but 2023 has very few, though we’re on the lookout for our budget in May as it will likely contain some revenue raising measures.

Australian Shares

The Australian stock market, as measured by the S&P ASX200 Index, rose by 8.7% in the December quarter, recovering some of the losses of previous quarters.  For 2022 the market was down 5.5%, or down just 1.1% when dividends are included.   

This was a sound result for Australia relative to more significant declines elsewhere. The variation in sectoral performance was dramatic. Energy sector shares were up 39.7% in 2022, utilities up 24.2% and materials shares (including mining) up by 4.8%. The laggards were consumer discretionary shares, down 22.7% and technology shares, down 34.3%.  

Clearly the turmoil in energy prices and markets globally had a net positive outcome for Australian share investors, though we caution that this won’t likely recur in 2023 as some commodity prices have already fallen sharply.

One constant with Australian shares is dividends, which rarely vary from approximately 4%, a notable exception being during the pandemic period. Dividends have now reverted to near normal, with some exceptional payouts from mineral and energy companies, and a recovery from pandemic affected payouts elsewhere. Commonwealth Bank, for example paid $2.10 per share in September, close to their highest ever payout of $2.31, and a big improvement on their miserly $0.98 distribution in September 2020.

Three distinct market volatility phases occurred last year. Firstly, the Russian invasion of Ukraine destabilised markets (particularly commodities) in February, then mid-year (and again in September) rising inflation and bond yields spooked investors and caused a rapid though temporary decline in share prices. When interest rates rise so too does the hurdle for share valuations to overcome. The relevant interest rate is the long-term bond yield, often referred to as the risk-free rate. When an investor can get a decent return from a risk-free bond (or term deposit), shares with more uncertain profit trajectory are often priced lower, to reflect the investor requirement for risk compensation. This phenomenon has certainly been apparent in technology shares as investors who hitherto had priced in unbridled growth whilst interest rates were close to nothing, ran for the hills when rates rapidly rose, and growth rates proved illusory.

Global Shares 

In the December quarter the MSCI world stock market index rose by 9.4%, a pleasing recovery from the carnage of previous months, but for 2022 the world index fell by 19.5%, representing the worst year since the 2008 GFC.