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Headwinds ahead as market watchers worry

Headwinds ahead as market watchers worry

Brace for difficult economic headwinds in 2023: Pitcher Partners survey

A defensive mindset may need to be part of a business arsenal in 2023 amid growing concerns that businesses will struggle against the headwinds of a tightening economy.

With global stocks losing about one-fifth of their value in 2022, very few in the business community expect the new year to deliver a meaningful rebound in fortunes.

These were the key takeaways from a new survey commissioned by Pitcher Partners Wealth (WA), which gathered insights from the heads of firms within our global network of accounting and advisory firms, Baker Tilly International, on business conditions.

Almost 70 per cent of respondents believe the global economy will continue to recede this year and about half anticipate that the US equity market will finish the 2023 calendar year in the red.

They cite underlying threats including higher input costs, unstable geopolitical factors and weakening economic growth for the gloomy outlook.

A deteriorating global economy would likely not leave Western Australian businesses unscathed, given the state’s significant reliance on exports which is firmly linked to world economic growth, and a heavy fall would bite the state’s economy.

However, the underlying ‘megatrend’ towards green energy and the reopening of China’s economy will continue to create demand for its resources seeing WA better positioned than most.

There may also be a silver lining for WA business if a severe slump can be avoided, as a mild economic slowdown may take some of the heat out of a tight employment market that has hamstrung many local businesses.

The heads of each firm of Baker Tilly’s global network are as close as anyone to the pulse of business around the world, and there is concern among many about the deteriorating economic outlook. There was a high level of pessimism among many international respondents about how the corporate and investment landscape will evolve in the coming months.

When asked to rank the top three external factors impacting business performance in their country over the next 12 months, a third of respondents nominated rising product and services inflation. It is well documented that many businesses are being challenged by the impact of input cost inflation. This said, the inflationary numbers released on Thursday night in the US show inflation pressures are easing along with continuing supply chain recovery, however they remain well above the US Federal Reserve’s target.

To rein in inflation, central banks around the world, including the Reserve Bank of Australia, are being forced to put up interest rates, targeting demand to slow the economy. Unfortunately, the use of monetary policy can be a bit of a blunt instrument because while increasing rates can help temper inflation, pushing too far can put the economy into recession.

It’s certainly a difficult balancing act for central banks to reduce inflation without collateral damage to the economy, or in other words to manufacture a soft landing.

While it is possible that central banks will be able to orchestrate a positive outcome, the base case remains that many economies around the world will enter a recession.  The key questions are when and to what extent the global economy weakens.

In the US, many mortgages are fixed for a period, so it may take longer for the effects of higher interest rates to flow through to curb consumer spending and slow the economy

From an investment perspective, should the economic environment deteriorate more than expected, investors will be required to exercise caution to not be over-leveraged, and make sure the quality of assets that you are buying is high.

Lower-quality assets can often do well when the market is flying as investors tend to be more optimistic and prepared to take on additional risk, but it is these assets that typically take the first hit when things start to soften and getting access to capital becomes harder.

In Australia, the All-Ordinaries Accumulation index proved comparatively stoic with a fall of 2.96% last year. While the local market has shown sturdy resilience amid global pressures, the question is whether it can continue to hold ground on the back of a tightening global economy.

Predicting a timeline for how things will play out is challenging with so many factors at play. Overall the balance of opinions for this survey of Baker Tilly global leaders leant towards caution, which is why investors should be reviewing their portfolios to consider these risks potentially emerging in 2023.

Christian Golding and Pitcher Partners Wealth (WA) Pty Ltd are authorised representative of Sentry Advice Pty Ltd AFSL 227748. This information is for general information purposes only and is not (and cannot be construed or relied upon as) personal advice. No investment objectives, financial circumstances or needs of any individual have been taken into consideration in the preparation of the content. You should always obtain professional advice to ensure products and strategies are suitable for your circumstances.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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