Some surprises likely for investors in the Australian share market in 2023

A degree of complacency as we enter 2023 may see some investors surprised by potential features of the year ahead, including uncertainty around corporate earnings and elevated commodity prices continuing longer than expected, according to Maple-Brown Abbott.

Chief investment officer Garth Rossler said investors waiting for signs that monetary tightening had peaked to add to equity positions reflecting the successes of the past decade could be disappointed.

“What happens to corporate earnings is perhaps the biggest uncertainty facing investors in 2023. Higher interest rates help to rein in inflation, but at least some of this will be achieved through reducing economic growth.

“At a market level, we see risks among the premium-rated growth and yield stocks where valuations have not yet fully adjusted to a higher interest rate environment.

“There has been little in the way of consensus earnings downgrades for Industrials in Australia, but we are starting to see some movement in the US. Of most interest is what is happening in the Tech sector, which enjoyed an extraordinary uplift in earnings during COVID, though those earnings have started to decline.

“Meanwhile, we see opportunities for investors in the energy and broader resources space over the medium term, albeit with the risk of shorter-term volatility given the uncertainties associated with the re-opening of China. Commodity prices remain elevated and we see potential for this to last longer than expected, with supply constrained by underinvestment and ongoing geopolitical turmoil.”

“With the rapid rise in interest rates already observed, and the likelihood of further increases, we see opportunities in companies that benefit from this shift such as insurers and banks. We also see a number of opportunities in out-of-favour companies with depressed earnings or multiples,” Mr Rossler said.

More specifically on Australian small-caps, Phillip Hudak, co-portfolio manager of Australian Small Companies, says earnings sentiment is broadly in line with the long-term average, although there is potential for material earnings downgrades to come through over the next 12 months.

“For investors, this means a shift towards companies with predictable earnings or structural earnings growth that are less at risk of earnings downgrades in an economic slowdown.

“Australian small cap market valuations are now looking reasonable relative to long-term averages.

“However, investors need to be selective in the current environment. We see an opportunity for quality cyclicals over the course of 2023 as COVID beneficiaries fully unwind and cyclical earnings expectations are re-based with potential oversold share prices.”

Mr Hudak says Australia is better positioned than many other countries, with the impact on company earnings from higher interest rates and rising living costs likely to be delayed given the RBA has been later with initiating interest rate increases, and more measured in the speed of its approach, opting to see the flow through impacts to the real economy.”

“Corporate balance sheets in the Australian small cap market are in good shape at this point in the cycle. In addition, the domestic consumer is in a better position relative to global peers given the still elevated savings rate.”