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2023 outlook: light at

the end of the tunnel?

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Alwyn van der Merwe

Director of Investments

There’s no denying that this year has been particularly brutal for investors in financial assets. Not only did global equities lose 14.1% during the 11 months to the end of November, but many of the Nasdaq-listed darlings of 2021 were in free fall – the Nasdaq itself declined by 25.7%. Our local equity market could also not escape the negative trend. After the hammering of 2022, what’s the investment outlook for 2023? Can we expect more of the same, or is there light at the end of the tunnel?

Since the start of my role as Sanlam Private Wealth’s Chief Investment Officer, this is my 15th attempt at reviewing the year that was and providing some insights into the prospects for financial markets over the next 12 months. It’s safe to say that over the past 15 years, we have frequently been surprised at how macro events have unfolded, and how asset prices have performed relative to our expectations. In fact, I often question the value of this exercise, as we know that no one can forecast consistently and accurately. Yet here we are at the end of another year, and I will again attempt the impossible!

The truth is that despite the obvious shortcomings of forecasting, we must and do endeavour to understand the macro environment, as this provides context and guidance on the value of a range of financial assets. If we don’t have a clear grasp of asset values with regard to where we are in the investment cycle, investment decision-making may boil down to mere guesswork or speculation – hardly a recipe for the successful accumulation of longer-term wealth.


Let’s start by revisiting what we said was important for the performance of financial assets at the start of 2022:

  • Global equity prices were generally expensive in terms of a number of valuation criteria
  • Within the global equity universe, so-called growth shares were trading at unsustainably high prices
  • Global bond yields were too low or, inversely, bond prices were too high following the stimulus that central bankers provided in an effort to boost economic activity in the aftermath of the outbreak of Covid-19 in early 2020
  • Higher-than-expected inflation was likely to become the biggest risk for financial markets if central bankers decided to target high consumer prices by hiking policy rates
  • We believed economic activity should cool if interest rates go up.

In short, we were cautious in our outlook for 2022.


As it turned out, 2022 was a horrible year for investors in financial assets. Not only did global equities lose 14.1% during the 11 months to the end of November, but many of the darlings of 2021 listed on the Nasdaq were also in free fall and the Nasdaq itself declined by 25.7%. Most of the damage occurred during the first six months of the year – equity prices recovered somewhat in the second half.

The South African equity market could not escape the negative trend. However, it returned 5.9% in rand terms on a year-to-date basis. Interestingly, local equities were flat in US dollar terms over the same period – a material relative outperformance.

Our concerns about global bonds were well founded. This traditional safe-haven asset class couldn’t escape the dangers associated with high prices and the higher-than-expected global inflationary trends. Global bonds lost 16.7% of their value and in the UK, the asset class performed woefully following the naïve approach of the short-lived Liz Truss fiscal regime. Global listed property was also impacted by the slowdown in economic activity and higher interest rates, losing 23.7% in US dollar terms.

Interestingly, I wasn’t engaged in any further debate on why we didn’t buy Tesla or bitcoin for our clients’ portfolios. The latter is down 64% year-to-date.


Looking back at some of these profound declines, it would be fair to say that they were more pronounced relative to initial expectations. These negative trends didn’t happen in a vacuum, however. When it became clear that sustained higher consumer inflation would trigger tough policy stances from central bankers on both sides of the Atlantic, there was very little margin of safety in the prices of assets that could protect their owners against higher-than-expected interest rates.

There’s no doubt that the Russia-Ukraine war added to the tide of negative sentiment that plagued investors. The war also had a direct impact on oil and energy supply and prices. These higher prices contributed to increased consumer prices – and therefore higher interest rates.

To add to the geopolitical risks, it has become clear that global investors have assigned a higher risk premium to Chinese equities after the 20th National Congress of the Chinese Communist Party in October, as investors continue to attempt to gauge potential policy priorities and the direction of the economic and social agenda in that country, as well as geopolitical relations in a multipolar world. In fact, we’ve often seen the phrase ‘China has become uninvestable’ after the congress.

There were also several political victims in the aftermath of the economic challenges created by higher consumer prices and lower economic growth rates. In the UK, Rishi Sunak became the third prime minister in two months after Liz Truss stepped down after a mere six weeks in 10 Downing Street.


It’s of course a highly challenging task to attempt to assess the prospects of financial markets in 2023, mainly for the following reasons:

  • Asset prices are no longer trading at high valuations – this is true for equities, bonds and listed property. However, the prices of these assets don’t reflect extreme negative investor sentiment either. To put it bluntly, they are also not obviously cheap.
  • There is always uncertainty associated with future economic outcomes. However, since these are dependent on how central bankers are likely to navigate slowing economic activity and still-high inflation, it’s tough to forecast – we’ve seen that policymakers can shift gears rather quickly. If they’re determined to bring inflation numbers back to target levels, we’re likely to see a recession in the US and Europe by mid-2023. If central bankers are more concerned about dwindling economic activity, the West might escape recession, but inflation risks are likely to linger.

We do know that equity prices are cheaper now than they were at the start of 2022. Seen in isolation, lower starting prices improve the return prospects of an asset class. Equity investors have been efficient in pricing equities for higher interest rates. However, we don’t believe equity investors have priced the asset class for a recession or the associated pressure on company earnings should economic growth rates dip into negative territory.

Given this uncertainty, we believe investors should be prepared for modest returns from equities over the next 12 months. Our analysis has indicated that equity markets usually bottom out during recessionary periods – another sell-off in equity prices would present excellent investment opportunities for long-term investors.

Globally, bond prices fell during 2022 as investors repriced for higher consumer inflation and as it became clear that central bankers would hike policy rates to manage inflation. Although yields are still well below the current inflation rates, they do look more appealing under the assumption that policymakers will be successful in bringing inflation back towards target levels.

We believe bonds are now showing fair value. Our clients with multi-asset mandates would have noticed that we’ve added to the asset class in recent months – for the first time in five years, we’re of the view that the value in the asset class justifies its inclusion.


How do South African assets rank against this global backdrop? The current dysfunctional political situation in this country is clouding the prospects of all local asset classes as well as the currency.

We don’t need to dwell on the well-known structural headwinds for local economic growth. The decay or implosion of essential state-owned entities, poor execution across most government departments and corrupt government practices are all contributing to subpar economic growth, which is unlikely to change. It appears that the South African economy is stumbling from one crisis to the next without any promise of escaping this low-growth trap. 2023 is not likely to be different.

This view is shared by both local and international investors. The irony is that many companies have learnt to operate efficiently in this suboptimal environment. Global investors have started to ignore this country as an investment destination and many South Africans are choosing to invest their savings abroad to diversify away from the obvious local risks.

This ‘rational’ behaviour, however, has resulted in attractive valuations for local assets. Being valuation-driven in our investment approach, we favoured South African assets in 2022 – a decision that has paid off handsomely. The relative valuation gap between local and offshore assets has closed this year. We still favour South African assets across the asset class spectrum, but we don’t believe the prospective relative performance gap will be as pronounced as it was over the past 18 months.

A tailwind that may boost local assets is the expected recovery in the Chinese economic growth rate as this economy reopens after a stringent zero-Covid-19 policy that will be phased out during 2023. Accelerated economic growth in China is likely to provide a boost to commodity prices – and South Africa will be a direct beneficiary of this.

Despite our political woes, higher commodity prices will likely spill over into better performance of the local currency, increased earnings for mining companies and higher consumer expenditure. So, it’s not all doom and gloom for South African assets. We can still buy quality local assets at attractive valuations that will benefit our clients’ portfolios through the investment cycle.


The macro outlook for 2023, both globally and locally, remains subject to significant challenges. However, unlike a year ago, asset prices now reflect many of these challenges. In our view, going forward, investors will be rewarded for the additional risk they take on when investing in growth assets such as equities. However, to ensure that macro uncertainty can be effectively navigated, we continue to argue for efficient and tailored diversification in our clients’ portfolios.

Our investment professionals have shared their insights on the investment lessons we can learn from this exceptionally tough year – read more here.

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