A recession is likely in the cards next year, but that doesn’t mean investors are facing an unwanted sequel to a dismal 2022.
Equity and fixed-income markets could be headed for better returns in 2023, with Canadian stocks also poised to benefit compared to those in the United States, according to IG Wealth Management’s investing outlook.
“Peak inflation, interest rates and asset class correlation, with equity prices hitting their lows, will present opportunities to investors who are able to navigate the market environment,” Philip Petursson, chief investment strategist at IG Wealth, said in a news release.
IG Wealth said equities are likely headed for brighter days because markets have already priced in a recession. Historically, the S&P 500 index reaches its highest point before downturns take hold, and sinks to its lowest before they end. That pattern may have already played out in 2022, which points toward “a higher probability of positive returns,” the report said.
The S&P/TSX composite index is also likely to come out ahead, but not because of a strong oil and gas sector, as was the case in 2022. IG Wealth said energy could lose its lustre in 2023, since any oil production increases amid an economic downturn could keep oil prices stable or even send them lower.
Instead, it’s the “significant valuation gap” between the S&P/TSX composite, which is near its lowest value, and the S&P 500, which still hasn’t reached its average, that could move investors away from the United States and give Canadian stocks the advantage in the medium term, the report said.
Further opportunities lie in the fixed-income market. Bond yields and interest rates have reached highs not seen in a decade, IG Wealth said, which means returns will likely be greater over the next 10 years. But cooling inflation and a recession are also good for bond returns, because central banks are more likely to reduce interest rates to mitigate a possible downturn, especially if inflation poses less of a threat.
IG Wealth also expects the equity and bond markets, which have been moving in lockstep throughout 2022, to break free of each other. That’s a good thing for investors because it will create greater diversification across asset classes.
It’s also possible an economic contraction will be a non-issue for investors.
“The force and impact of a possible recession may prove to be shorter, and milder, than historical averages,” Petursson said.
For one thing, growth in the money supply, which helped fuel inflation, has already come back down to normal levels. A strong labour market in both Canada and the U.S. is also likely to take the sting out of any downturn. The result could be a recession “in name only,” the report said.
But there’s another reason a better year might be in store for investors: We could finally be nearing the end of all the economic upheaval brought on by the pandemic over the past two-plus years.
Inflation may have reached its peak, allowing central banks to slow or even cease interest rate increases altogether, so investors may soon begin to feel like they are on steadier ground. As a result, Petursson said the upcoming year will be about “resolving the uncertainties and investors will be rewarded with an improved market environment.”