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The top macro indicators to watch in 2023

Nine of Australia's finest fund managers share the big-picture themes and data points they are watching as the new calendar year begins.
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After a 15-year slumber, macro returned with a vengeance in 2022. All those years of near-zero interest rates created a "bubble of everything", fuelling asset prices along with it.

Soaring inflation, rising rates, and a raft of global uncertainties saw that bubble pop spectacularly - sending asset prices south with it.

Unsurprisingly, the experience of 2022 may have investors feeling a little wary about how central banks will fare in their race to bring inflation back to target. And inflation is only one part of the story...

China is reopening to the world after being effectively locked down for nearly three years. The Russian invasion of Ukraine is still ongoing. And both consumer and business confidence levels in Australia continue to hover at early 2020 and late 2021 lows respectively.

As part of our Outlook Series for 2023, we asked nine fund managers who keep a close eye on the big picture to share the top macro indicators worth watching over the next 12 months, as well as what it could take for investors to start feeling a lot more bullish. 

And in a world where the impact of record-breaking inflation on earnings is still unclear, 2023 is shaping up once again to be a year where the macro environment could dictate the narrative in financial markets.

Our featured experts include:

Note: We would like to thank the fund managers for sharing their insights ahead of 2023 in the spirit of the Outlook Series. This article is not, nor is it intended to be, a set of recommendations. Please do your own research and seek advice from a professional before making any investment decisions of your own. 

This vision was filmed on the 6th of December 2022. You can watch the video by clicking the player, listen to an audio version, or read an edited transcript below. 

Edited Transcript

Matthew Kidman: Hello, I'm Matthew Kidman.

Ally Selby: And I'm Ally Selby, and today we're going to be asking our fund managers which macro indicators they're watching in 2023.

Matthew Kidman: It'll be really interesting because macroeconomics has absolutely dominated markets for the last 12 months.

Andrew Clifford: Investors should keep a close eye on China and the US

Matthew Kidman: Andrew, a lot of macro investing over the last couple of years. Interest rates, COVID. What are the macro themes that you're looking at in 2023, and what do you think it would take to get people from bearish to bullish in that calendar year?

Andrew Clifford: Okay, so let's take the US to start with. Clearly, I think the way of looking at the situation here is it's all about tightening liquidity. The money supply is actually shrinking there, well before we've come to the end of the rate-tightening cycle. 

So I think we really need to see that process end and we need to see some credit being created, and money supply being created, before you can really think about being bullish. 

The other big economy in the world, China, is clearly in a very deep recession by its standards. And here, I think the focus is going to be on the property market, residential sales picking up again. In either case, those things happening, it'll be an opportunity to become more constructive about markets.

Catherine Allfrey: The earnings disappointment may not be over yet

Catherine Allfrey: We clearly need to see the peak in inflation, which we may be seeing at the moment, both in the US and Australia. And also the peak in interest rates, and that would make one more bullish. 

But in terms of indicators, it's always similar indicators. We look at the Citi Economic Surprise Index, in terms of China always following what's happening with credit over there, that's really important. It feeds through into iron ore and infrastructure development. House prices here in Australia are obviously a big one, in terms of consumer confidence, etc. But there are lots of macro data that we follow.

Ally Selby: And when do you think we could see a turning point for the market?

Catherine Allfrey: Well, we've seen a big move, right? In the last couple of months, we've had a 13% lift from the bottom, and we are starting to work out when it is going to go on the other side, to be perfectly honest. 

Usually, there's a Santa Rally and then we come back in January and it can flip over. And what will cause the flip over will be the earnings side. So we really haven't seen that out of Wall Street in the last two quarters, that's been actually quite better than expected in terms of earnings. But maybe this December quarter results season could actually be quite disappointing.

Anthony Aboud: Corporate earnings to bottom mid-2023

Anthony Aboud: I think Australia's about six to nine months behind the US and UK, and maybe even the EU. And so just trying to analyse the lead indicators there will give us a good indication. A lot of those economic indicators are heading south. 

So what we are looking for is how transport and housing are going over in the US, inventory levels, and how much slack there is in the system because that'll be an indication of potential deflationary pressures coming through. And so that's what we're going to be focused on. 

What would make us more bullish? Well, we'd want to see corporate profits come under pressure and for the share price to actually reflect that. It's not until that actually starts happening that you can actually start getting bullish.

Ally Selby: How long away do you think that is?

Anthony Aboud: I'm thinking mid-next year at this point in time, but it's a light step in the dark grey.

Mary Manning: Company guidance will reset expectations 

Mary Manning: I'm not super bearish. At Alphinity we follow earnings leadership. So that means we invest in companies where the earnings are in an upgrade cycle. And even though there's a lot of bearishness in the market, there are still many stocks around the world that are in the earnings upgrade cycle. So what we're looking for is how fourth-quarter earnings do, because overall earnings could still be too high. And then how companies guide for 2023. 

You could see a situation where fourth-quarter earnings are quite disappointing, but then companies use the 2023 guidance to reset that bar lower. And that's going to be a very interesting time to look for new stocks because you have a clean slate for what's going to happen in the 2023 financial year.

Matthew Kidman: So resetting expectations is key.

Mary Manning: Absolutely.

Oscar Oberg: Small cap valuations are looking (really) good

Oscar Oberg: We're feeling very bullish at this point in time.

Ally Selby: Really?

Oscar Oberg: In terms of the valuations that we're seeing in small and micro-cap companies, it's the best we've seen in over 20 years. Balance sheets are very, very strong. If you look across all the funds that we manage, around 50% of the holdings are actually net cash or have more property on their balance sheets. So we do think our companies are well placed to navigate what will be a tough environment. 

If I had to pick the macro indicator that I think we're all watching, it's got to be around inflation. What makes up that inflation and is it cyclical or is it structural? 

I think the most pleasing thing for us is over the last few months, we're starting to see those cyclical elements of inflation come out. So I'm thinking freight, logistics, and also used car prices in the US. 

But we need more of the constituents of the consumer price index, such as rents and labour and food and so forth to start coming down. And we do expect that will happen in 2023. And once that happens, we do think demand will return in the small-cap sector.

Ben Clark: We've seen a peak in bond yields

Ben Clark: The elephant in the room is rates, bond yields, and how hard central banks go. When do they step back and say, "We can see a glide path and we are willing to let inflation take its own course without pushing it too hard." 

And I think that really remains the biggest issue for investors. My view is we've seen a peak in bond yields and that we're coming down the other side now. I don't think it's necessarily a reason to be bullish on the market, but I think it's a reason that you can be more confident in what you should be paying for a business.

Matthew Kidman: The recession may not be as bad as everyone thinks

Matthew Kidman: I think the two things we're trying to look at in financial markets and equities are earnings and interest rates. So we are watching them very closely. Everyone's anticipating a big slowdown in earnings next year because rates have gone up. They are the two things that really matter. 

My little bit of a suspicion is that maybe the recession that everyone thinks we're going to have next year is not quite as bad, and that might be the impetus for a bit of bullishness sometime in 2023.

Ally Selby: Do you mean a recession in Australia or a recession in the US or Europe?

Matthew Kidman: Well, more importantly, the US when it comes to equity markets. Australia's important in individual companies, but overall markets, the US leads and that's what we'll be watching.

Ally Selby: Okay. And what needs to happen before you can start feeling really bullish and want to put all your money in the market?

Matthew Kidman: I think what would be really nice is if inflation - the headline numbers we keep getting each month - keep coming down, but the economy doesn't absolutely fall over. So it gives the Federal Reserve that chance to not lift rates as high. And it looks like they're slowing it down at the moment. So if they can take the foot off the pedal, inflation comes off, and growth doesn't die. That's Goldilocks.

Jun Bei Liu: Corporate earnings to bottom in the next 3-6 months

Ally Selby: What macro indicators do you think you'll be watching in 2023, and what do you think needs to happen before investors can start feeling bullish again?

Jun Bei Liu: I think the key is that corporate earnings need to bottom. We know we are heading into a slower environment, and yet, our corporate earnings are actually still holding up pretty well. We know it needs to come down and it probably will bottom in the next three to six months. 

In the US, it probably will bottom in the next three months. We think the March quarter is probably where we will see some of the weakest points for corporate earnings. Once investors get comfortable that earnings are as low as they will go, people will jump in and this is when you will see the true rally across the share market.

Romano Sala Tenna: Why the market could pivot in the second half 

Romano Sala Tenna: I think it's really looking at corporate earnings. While there's a lot of noise when it comes to interest rates and inflation, the reality is you look at those things to understand the impact on corporate earnings, and corporate earnings are what drive share prices. So that's going to be our focus for 2023.

Matthew Kidman: Okay. And we're all a bit bearish at the moment and a bit cranky with the world. What's going to turn us bullish during the calendar year?

Romano Sala Tenna: So I think we have to get through some pain first. I don't see how corporate earnings don't rebase and rebase material lower given consumer sentiment, the impact of interest rates on corporate debt, and the impact of inflation on corporate inputs like wages and the like. So I think we have to experience some pain first. And I think we see the market pivot in the second half with the US Fed turning dovish.

Matthew Kidman: Come home with a wet sail.

Romano Sala Tenna: Yes. 

What are you watching in 2023?

The fundies have revealed their top macro indicator for the year ahead, now it's time to turn the mic to you. Let us know what macro indicators you are watching this year in the comments section below.

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