Getting Ahead of Inflation Changes in 2023

The inflation rate is falling – and that’s a good thing – but what does it mean for our investments?

In 2023, we’ll need to make investment decisions considering the uncertain financial climate we’re enduring – considering a number of possible potential futures.

What will happen to inflation in 2023?

Thankfully, inflationary pressures are easing, including the cost of energy, which is slowly but surely reducing, while the pressure is lifting from overburdened supply chains.

Though the rate of inflation is falling – that’s for certain – it isn’t yet nearing what we’ve historically considered normal, at around 2%. 

Across the globe, the rate of inflation sits between 8-11%, depending on the country, so prices are still increasing significantly more quickly than in previous years, pre-covid. It’s important to remember that falling inflation doesn’t mean prices are reducing – it just means they’re increasing less quickly.

What isn’t clear is where inflation will fall to, whether it will slowly return to pre-covid levels or stabilize at a higher rate – or whether the drastic economic change will tip us into recession.

When experts agree that inflation rates will be the most influential variable on investments in 2023, what does this mean for investing?

Currently, the valuation of stocks is higher.

The valuation of stocks at the beginning of this year is higher than at the same time last year – when interest rates were hiked to combat inflation – as stocks escaped the bear market in the latter half of the year.

In terms of both equity and especially fixed-income assets, valuations have risen, with the stock market looking healthier than it has for the last year. Some of the most influential indexes – including the S&P 500 and NASDAQ – are up by several per cent compared to the previous quarter.

However, valuations are still lower than we could expect in the more favourable market conditions pre-covid.   

If we head into a recession, the stock market is likely to fall.

Though the stock market is performing better for now, if a recession hits – and trade and industrial activity slows – it’s likely the stock market will take a hit once again, as companies’ sales are hit, and growth slows.

If this happens, some sectors may be better equipped to handle the downturn than others.

Sectors such as healthcare, utilities and logistics are more recession-proof than businesses such as those in the retail and leisure/hospitality industries. 

During a recession, a declining economic activity often leads to less money spent on leisure, experiences and luxuries – so it might be a good idea to steer clear of these sectors when investing in 2023, at least until it becomes clear whether or not we’ll endure a recession.

Consider diversifying with commodities.

The price of commodities fell last year due to interest rate hikes and the Ukraine-Russia conflict, which curtailed supply from some of the most important metal and agricultural exporters in eastern Europe and contributed to the energy crisis.

However, commodities are performing better at the start of this year. Commodities also have a low correlation to the stock market, so they present a good option for diversifying your portfolio, especially considering the possibility of recession and a stock market tumble.

Bonds may present the most attractive investments.

In contrast to the last year’s poorly performing stocks, particularly US savings bonds, have yielded unusually high percentages.

Last year, demand for high-yielding bonds was so great that the US Treasury Direct site crashed on the last day that Series I savings bonds – with a bond rate of almost 10% – were being sold on the site.

While bond rates aren’t as high as the last quarter on average, they’re still offering higher yields than historical ones.

Investors should look for long-term opportunities.

In 2023, the uncertain, potentially volatile financial climate means that long-term investing – rather than short-term trading – represents the best opportunity for maximizing your assets.

The key advice for investors is to make investing choices – especially into stocks, funds and ETFs – carefully and hold out despite short-term market fluctuations and media tattle. By wearing out the small downturns, you’ll be able to watch your investments grow over the decades, despite what 2023 has to bring.