What to expect for the rest of 2023

Recession is likely, but we can handle it, explains Ed Tomlinson.

As we enter the last half of 2023, economists say there’s only a 50% chance Australia will fall into recession, and a slightly higher chance in the US at about 60%.

And even if Australia does fall into recession, with the government handing down a budget surplus for 2022-23 of about $20 billion, we’re in a good place to handle the negative impacts.

This is a surprising outcome, given the pessimism we saw in 2022. And it’s due to the resilience in economies and the optimism in investment markets in 2023.

This led to investment results exceeding expectations for the 2022-23 financial year, driven by strong growth in global sharemarkets, especially US technology stocks. Overall, member returns were better than we expected, given the challenge of high interest rates and increased cost of living pressures.

While we’re not expecting strong growth for the rest of the year, any recession should be mild and likely won’t destabilise investment markets. That’s because employment is holding up nicely – indicating broader strength in the overall world economy.

While inflation moderated in the first half of 2023, it remains well above the Reserve Bank of Australia’s target level of 2% to 3%. And there’s no real signs it’s on the way down globally, despite aggressive moves by central banks since early last year. This constant pressure complicates the picture for the second half of 2023. Should inflation not move back towards target, interest rates will likely remain higher for longer.

The global sharemarket surged in the past few months, especially in the United States, with tech stocks leading the way. That’s because investors are focused on the early signs of economic recovery, as inflation seems to stabilise, and companies report healthy profits. The Australian sharemarket didn’t perform quite as well as those overseas, because we don’t have those big tech stocks driving it.

The sharemarket really was the star performer as other investment markets didn’t do so well: property fell as office occupancy remains at a low, and bond prices dipped as the struggle against inflation continues.

But a word of caution on the sharemarket: the rapid jump in share values means there’s a high risk this could reverse. So smartMonday continues to plan defensively with our investments.

While the impact of interest rate rises, inflation, and global uncertainty remain front and centre within the economy, it is reassuring to see smartMonday’s ability to deliver competitive outcomes for members. While economic pressures are hard to ignore, smartMonday continues to perform well on a long-term basis with most options performing in line with relevant investment objectives.

Our view is that a recession is most likely and we’ve positioned smartMonday portfolios for that likelihood, insulating against excessive risk by reducing exposure to riskier investment assets. While recession can be stressful for superannuation members, the best approach is to stick to an appropriate long-term strategy to take advantage of the rising long-term trend in markets.

Ed Tomlinson is chief investment officer at smartMonday