Why stock markets, including Singapore’s, should boom in 2023

TERRIBLE 2022 is over. Expect the Straits Times Index (STI) and global stocks and bonds to boom in 2023, as a bull market no one foresees delivers strong returns – 15 per cent, 20, 25, maybe more.

Few can believe that, after 2022’s cavalcade of fears drove a global bear market. I understand that. But gloom is precisely what fuels the steep recovery I see coming, as positive surprise in the form of relief gradually washes over markets.

First, disclosure: Last January, I told you to expect a choppy start to 2022 and stocks surging late. That was true for the STI, which drifted down 11 per cent through Oct 24 before rebounding to near flat as I type.

And the general pattern fit global markets. But I didn’t foresee world stocks’ early weakness morphing into a bear market.

Now, unyielding gloom has most expecting an even worse 2023 – dismissing any rally or positive news as false. But that widespread view is the pessimism of disbelief I described on Oct 3. All stocks need now is reality topping these wretched expectations. It will.

On Nov 7, I showed you the signs of easing inflation ahead. Since then, those signs are starting to show in data. America’s consumer price index growth slowed to 7.1 per cent year over year in November – down two full percentage points from June’s 9.1 per cent high. Eurozone and British data are lagging this, but both seemingly crested in November. That should continue.

Fears over inflation should ebb, buoying stocks. Meanwhile, falling inflation expectations should reverse long-term interest rates’ rise. Globally, yields are tightly correlated. Already, US 10-year yields are down 56 basis points from Oct 24’s high.

Singapore’s yields are down more, by 68 basis points. Falling bond yields mean rising bond prices, reversing 2022’s bad bond returns. Bonds’ positive correlation with stocks stunned many in 2022, as both plunged. In 2023, that surprise continues – but on the upside.

Next, consider Hong Kong’s and China’s reopenings. Bears shriek at the virus surging now that restrictions are relaxed. But they shrieked when zero-Covid policies curtailed commerce, too. Yes, cases could spread; and the human impact could be bad. GDP and stocks may wiggle initially as companies adapt. But coldhearted stocks see past that – to normalising economic activity.

Goldman Sachs sees China’s loosening boosting Singapore GDP by 1.2 per cent. Hong Kong GDP should get a much bigger benefit on export and tourism jumps, buoying Singapore Exchange-listed Chinese and Hong Kong companies.

Further fuelling 2023’s turnabout: global politics. On Sep 5, I explained why America’s midterm legislative elections’ repeatedly positive power would drive United States, global and Singapore stocks in Q4 2022 and into 2023. This prediction has come partly true since, as the vote brought the bullish gridlock I described.

This year marks US President Joe Biden’s third in office. The S&P 500 hasn’t suffered a negative third year of any president’s term since 1939, World War II’s start (and then only by -0.9 per cent). Third-year returns for the index have averaged 18.4 per cent in US dollar terms since good data started in 1925.

That Biden’s second year ended with negative returns also bodes well. In the nine other years this happened, third years had a turbocharged 28.7 per cent in median USD returns.

The third-year effect spills over to the STI, too. Since good data begin in 1965, the STI also fared best in US presidents’ third years: averaging 22.2 per cent returns and rising in 79 per cent of them.

But global recession is coming, say the bears. Perhaps, but most economic data globally are mixed and lending remains robust. There is no clear sign a global recession is coming. And the most commonly accepted recession indicators have shrieked recession so long, most companies have already long undertaken mitigation efforts – making recession less likely or less bad.

Regardless, stock investors should ask a different question: Would global recession surprise anyone? That is doubtful. Bank of America’s December Global Fund Manager Survey shows 68 per cent of respondents expect one. The Federal Reserve Bank of Philadelphia’s recession expectation index is at all-time highs, and by a lot. If there is no recession? That would be a huge positive surprise. Even a shallow recession surely exceeds expectations, bringing relief.

Historically, global bear markets’ biggest losing categories bounce highest in bull markets’ first thirds. That isn’t great news for the STI, which was a relative fortress in 2022’s storm. It’s especially bad news for Singapore’s banks. The real estate sector, hit by rising rates, holds more opportunity in a recovery.

Beyond this, shop globally. Look to consumer discretionary companies, such as European luxury goods makers. Own hard-hit tech stocks, particularly those from the US. Don’t chase 2022’s star, energy. Sinking commodity prices mean it likely lags.

Look past the gloom. Position for a great and hugely unexpected recovery year.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally