3 macroeconomic events that can affect your stock portfolio in 2023

2022 was a difficult year for many investors, especially for those with little to no exposure to energy stocks. The S&P 500 index was down 19.44% — its worst year since 2008, while the Nasdaq and Dow Jones declined 33.1% and 8.8% respectively.

Turning towards 2023, some investors expect the bear market to persist and a recession to hit. Likewise, in JP Morgan’s 2023 outlook, analysts project the global economy to grow at a sluggish pace of around 1.6% and forecast a U.S. recession to likely occur before the end 2024.

If you are curious on how certain macroeconomic developments would impact your portfolio in 2023, here are three events you should look out for.

1. Interest rates

The health of the economy and inflation remain a concern in 2023. While recent data has shown that U.S. inflation is declining after peaking at 9% annual rate in June, the November consumer price index (CPI) showed inflation still hovering at 7%. With the U.S. Federal Reserve’s goal to return to 2%, markets are expecting interest rates to increase again on February 1, 2023, by 0.25 percentage points to 4.5% – 4.75 to further stem inflation. Any shocks like a worsening of the Russia-Ukraine conflict or unforeseen supply chain disruptions would push inflation higher.

Now, how will rising interest rates affect your stocks?

Growth stocks in their development stage that depend heavily on debt to sustain high growth projections would be affected by higher cost of borrowings. In turn, investors would assign lower growth expectations on these companies, thereby reducing its share price. At the same time, companies that are highly leveraged, or REITs with high gearing ratios and proportion of floating rate loans would be negatively impacted by higher repayments on current debt. Conversely, investments in the financial sector such as banks, mortgage and insurance companies would likely be greatly favored by investors as they stand to benefit from higher interest rates.

2. Stronger U.S. dollar

The relationship between the federal funds rate and the U.S. dollar is positively correlated – where an increase in rates will typically strengthen the dollar. Why? This is because higher yields from assets like the U.S. treasury bonds will attract foreign investors to sell their local currencies in exchange for these U.S. dollar-denominated investments. This increase in demand for the dollar will therefore result in its appreciation.

Federal funds effective rate. Source: FRED
Nominal broad U.S. dollar index. Source: FRED

How will this affect your stocks?

As many investors invest in globalised American companies (e.g. Apple, which has over 50% of revenue derived from outside the U.S.), overseas revenue will face forex exchange headwinds. This currency risk occurs as the proceeds from international sources – denominated in foreign currency – will need to be converted back to the U.S. base currency for reporting. Hence, companies will earn lower revenue in USD terms and potentially miss earnings targets despite strong foreign sales just because of forex fluctuations.

3. China’s reopening

After three years, China has finally announced that it will be reopening its economy and borders from 8 January 2023. In fact, the Hang Seng index has risen 36% in the last two months as investors regained confidence in anticipation of a rebound in the Chinese economy.

According to a Morgan Stanley report, China’s reopening would likely ease global inflation as they are the supplier of 15% of the world’s goods exports. China will drive both demand and supply, and ease global supply chain issues.

Source: Bloomberg

That said, volatility will likely remain as uncertainties persist surrounding the Covid-19 situation in China. With Chinese New Year around the corner, China expects sharp spikes in travels, with 2.1 billion trips by air, land and water to be made, twice as much as last year.

This anticipated travel situation would potentially trigger a surge in Covid-19 cases. However, as investors, we should continue to monitor how it will play out, as it will provide a good indication of CCP policies towards the extent of reopening.

How will China’s reopening affect your stocks?

China stocks and indices could see high potential upside if the reopening turns out to be a successful one. Internet companies could see a sharp turnaround performance once investors see convincing data on improvements in consumption.

Source: SCMP

Goldman Sachs analysts are expecting consumer-facing sectors like hotels, catering, and entertainment to be the biggest beneficiaries. Likewise, foreign companies with significant exposure to China will also enjoy higher growth rates in those segments. Investors would likely start to turn towards China stocks once uncertainties are cleared.

The fifth perspective

As investors, it is good to be aware of these macroeconomic factors that could affect your portfolio and make necessary adjustments accordingly. However, investment decisions should not be solely made based on those factors but also on the underlying business and its moat.

Brandon Teo

Brandon has a strong interest in analysing equities, focusing on fundamentals and growth. He graduated with a Diploma with Merit in Business at Temasek Polytechnic and ranked first in his course. With a passion for the finance field, Brandon will be exploring the investment banking sector. He is currently pursuing a business degree as an undergraduate at Singapore Management University.

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