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Share market tipped to gain in 2023 after fall in 2022
The Australian share market is tipped to fall by up to 9 per cent in 2022 but to rise 5 per cent to 8 per cent over 2023, according to new forecasts from CommSec. While share prices have fallen this year, Australian companies remain well cashed up and profits sit at record highs, which will help to drive gains next year, according to the research house.
But first, weakness in equities is expected and possible earnings downgrades; higher interest rates will cause consumer spending to slow down, and with that, companies will experience pressure on profit margins and earnings expectations are likely to be adjusted lower as growth slows. That will weigh on share prices this year with losses estimated at between 7 and 9 per cent.
“At the start of the year we forecast modest 5 cent growth of the Australian share market over 2022 after the stellar gains of the previous year. But even these relatively downbeat views have proved too optimistic,” said CommSec chief economic Craig James (pictured).
Looking forward, cheaper valuations, attractive dividend yields and Australia’s likely economic outperformance will support local shares in 2023, CommSec’s James predicts.
Diana Mousina, the senior economist at AMP Australia, also sees more downside risk in the short-term as the share market battles with the possible recession, high inflation and rising interest rates. “This means that volatility for shares is expected to remain high. For the S&P/ASX200, we expect the year-ended index to be around 7000, a recovery from current levels but below the early 2022 highs,” she says.
“By late 2023, we see the ASX200 back at around its highs of 7600 as inflation falls with risks of deflation in some areas like goods which have been hit by supply chain issues recently. Central banks could cut [interest] rates again after going too aggressive in 2022 and early 2023.”
In terms of financial years, after rising by around 25 per cent in the 2020-21 financial year, the S&P/ASX 200 fell by 10.2 per cent in 2021-22, just the third financial year loss in the past decade, according to CommSec. While losses for Australian shares exceeded those in Japan in 2021-22 (down 8.3 per cent) they were generally in line with European and US markets. The US Dow Jones fell by 10.8 per cent over 2021-22 with the S&P 500 index down by 11.9 per cent while the Nasdaq fell by 24 per cent.
Earnings downgrades to come
UBS too recently cut its year-end target for the S&P/ASX 200 to 7000, from 7700. The investment bank expects the share market to be weighed down by a wave of earnings downgrades in coming months.
“Earnings are now on course to follow equity prices lower, and it appears as though we now have to assume that we will be facing cuts to earnings estimates through to early next year,” said UBS strategist Richard Schellbach and analyst Akash Biradar.
“As well as being vicious, the latest sell off has been indiscriminate and broad based. Stocks exposed to the domestic consumer have been hit hard on growing concerns that the highly indebted Aussie consumer will be squeezed, as the RBA is forced to tighten policy more aggressively than was previously thought. Meanwhile, mining and energy stocks – which until very recently had been the one truly bright spot of the equity market – have been buffeted by an increasingly gloomy outlook on global growth.
“Sharp corrections are clearly a stressful time for investors, however the silver lining is being able to possibly re-enter stocks at more favourable levels, and thus set oneself up for strong returns over the next cycle,” said Schellbach and Biradar.
“We are still too early in the coming earnings downgrade cycle to fight against it. Through previous ASX earnings downturns, share prices were never able to stage sustained recoveries until at least the half-way point through the earnings downgrade cycle. This would suggest equity prices may remain under pressure until later this year,” they said.
The strong labour market is one reason economists expect the share market will gain next year. According to the Commonwealth Bank, the jobless rate is expected to average around 3.8 per cent over the remainder of 2022 but lift to 4.2 per cent in September quarter 2023. The economy is expected to continue to operate at ‘full-employment’. In response to the tight job market, wage growth will lift to around 3.25 per cent by March quarter 2023 from current annual growth near 2.4 per cent.
The Commonwealth Bank expects the Aussie dollar to hold broadly between US60 cents and US70 cents over the coming year. The Aussie is tipped to ease to lows near US62 cents in the first half of 2023 before recovering to US66 cents by December quarter 2023.
