Investors should not let themselves succumb to panic in the New Year, even though many economic shocks are predicted, according to John Vail, chief global strategist at Nikko Asset Management, a global financial firm based in Tokyo.
Instead, investors should be selective in picking stocks and other investments and should be prepared to wait out the ups and downs of the short-term markets, Vail said in presenting his predictions for 2023.
“Many macro-economic, corporate earnings, and credit shocks likely lie ahead in the short-term, as the global economy descends further into a semi-stagflationary period; however, this is part of the healing process in which the intermediate-term outlook is actually improving,” Vail said.
In the United States, the split nature of Congress could be a problem economically. The Republican control of the House is bound to cause major disputes in 2023, including the various political investigations that are on-going and likely to cause discord that will have economic repercussions, he said.
Globally, political events will continue to be a factor economically, especially with Russia, Iran and China pursuing their separate paths. “The Russia-Ukraine war will continue through 2023, but possibly in much less bloody way, so this may calm risk markets. One also needs to keep a careful eye on the Middle East, especially Iran, as tensions remain greatly elevated given its internal problems and an even more assertive new Israeli government,” Vail predicted. China, in particularly, will see improved economic growth in 2023 while most of the rest of the world will be sluggish.
However, Covid will continue to plague the economies of many areas, including China. “We have predicted that China would open up the country sooner than expected, though gradually and somewhat furtively,” Vail said. “Springtime will likely witness a near full opening in China.”
Central banks around the world, except for in Japan, will keep rates high and that will play a role in how inflation evolves. The power of labor strikes in Europe, which are not being widely covered by U.S. media, will have an impact on where inflation goes.
Investors should be wary of putting their money in countries with too much concentration in the tech hardware sector because the countries’ economies may not flourish. “Industry fundamentals will remain challenged, including the upcoming oversupply of semiconductors over the intermediate term,” he added.
As of now, the equity market in the United States remains expensive compared to most other countries that are inexpensive and could perform reasonably well. Europe, however, is suffering from unique difficulties, and may remain inexpensive for a longer time. “Within this backdrop, stock and sector selection will clearly be the most important key to achieve positive returns,” Vail advised.
The challenges faced by the crypto sector are likely to continue. “The recently exposed lack of due diligence by many institutional investors is shockingly disappointing, as were the attitudes and practices of many industry leaders,” Vail said. “Partly because of this, most ‘growth at any price’ companies now will heavily scrutinized by venture capitalists, public-market investors, banks and regulators. This is bound to expose other problems,” he predicted.
In short. “2023 will be a year like no other. Investors should not rely heavily on traditional models of previous economic and financial market recoveries, as we are entering a unique era,” Vail concluded. “Rather, they should maintain a somewhat cautious and balanced perspective, with targeted risk-taking in select countries, sectors and stocks. Indeed, active stock selection, in particular, will be more important than ever in 2023, so special attention is required in selecting managers who have excelled in the last several challenging years.”