Five things investors should be prepared for in 2023

Inflation and interest rates still high on the agenda

With 2023 now in full swing and everyone expecting a recession to hit, David Henry, investment manager at Quilter Cheviot, says investors should look out for five things happening this year and prepare accordingly.

Inflation is going to fall. By a lot

Henry said: “People hate costs going up. Not only is inflation bad for bonds, and bad in the short term for stocks (by placing downward pressure on valuation multiples), but by its nature all of us are reminded constantly of price rises every time we fill the car up or go to the shops.

“Most of us feel poorer in real terms now than we did this time last year, a conclusion that has been reinforced, over and over again, during thousands of transactions over the past year.

“There is an old saying that the cure for high prices, is high prices. There is a point where people get a bit tired of spending £5.50 ($6.67, €6.21) on a bottle of olive oil, and just decide to buy less olive oil. If most consumers are feeling the pinch, then it is likely that they will tighten their belts somewhat, and less demand means fewer cost increases.

“The obvious counterpoint is that the job market remains strong, and wages are going up. But they still are not keeping pace with inflation.

“Inflation really started to move at the tail end of 2021, and so we are now coming into a period where year-on-year comparisons are versus already elevated prices. For one example (there are others) just look at gas prices in the US – now lower than the beginning of 2022.

“The benchmark that prices have to rise above to show positive year on year inflation is much higher than it was this time last year. The shorter-term numbers show that inflation is starting to fall, potentially rapidly. It might not make 2% this year in the US, but I do not think it will be far off by the end of 2023.”

Tags: Quilter Cheviot