After a year that was anything but normal, the question is, what may lie ahead?

Chief Market Strategist Ronald Temple recently hosted a wide-ranging discussion with our Sydney-based portfolio managers at Lazard: Dr. Philipp Hofflin, Portfolio Manager/Analyst from our Australian Equities Team and Warryn Robertson, Global Equity Franchise /Global Listed Infrastructure, Portfolio Manager/Analyst.

In their view, the critical issues of the past 12 months—inflation, monetary policy, and the risk of recession—are likely to remain front and center, though in a different configuration over 2023. Inflation pressures, which dominated the markets in 2022, have, in our view, likely peaked across most developed economies.

Nevertheless, the strength of the US economy and the pervasive nature of price increases in Europe make it unlikely that inflation will descend to central banks’ target of 2%—which to our panel may means more interest rates hikes to come in 2023. The US Federal Reserve’s funds rate could reach 5%–6%, well above current market expectations, and the European Central Bank may take rates to 2.5%–3%, resulting in short and shallow recessions in both regions during the year.

While the shift to higher inflation and higher interest rates that began in 2021 and 2022 may feel different, it is a return to some normalcy after more than a decade of deflation and ultra-low interest rates following the global financial crisis in 2008.

In fact, we believe the global economy appears to be entering a period of structurally higher inflation overall: a longer-term shift stemming in part from the increased costs associated with reconfiguring supply chains—the on-shoring or “friends-shoring” of production—and in part from the increased spending associated with climate change in the years ahead.

In Australia, we see inflation risk as being lesser, but still present, and the Australian property market looms over the economy and markets as a risk to be aware of.

What does this all mean for the financial markets?

The bottom line: What ups and downs may be in store for the market? The answer is not a simple one because the complex issues and risks in 2022 have not gone away. However, after a year marked by shocks, surprises, and the beginning of dramatic, long-term shifts, investors may be better prepared to approach the year ahead with an eye on differentiation and fundamental analysis when it comes to investing. Value investors have had a strong 12-months, but we believe, the value rotation has some room to run, particularly for fundamental value investors.

Click here for the full interview

Source: Lazard Asset Management - 29 Dec 2022