Why this fund sees a “significant upside” for ASX stocks in 2023

2022 has been a difficult year. At the time of this writing, the S&P/ASX 200 Index (ASX:XJO) is down 9%. But I’m going to tell you from a fund manager’s perspective that 2023 could be a good year for the ASX equity market.

Fund manager Isaac Poole of Oreana Financial Services wrote on Livewire that a move to a pause in interest rate hikes by the Reserve Bank of Australia (RBA) and the US Federal Reserve would mean that there was a “reset of bearish recession expectations”. And it will bring a huge upside to Australian equity markets through 2023.”

Economic views

According to Oreana and Poole, a mildly restrictive RBA spot rate will drive house prices down, but they may not drop 20% as some predict.

The expert opinion is that higher interest rates:

… restrain housing activity, house prices, household spending and household borrowing. And that will bring inflation down, allowing the RBA to rise less than the market expects. And let house prices fall less than the consensus predicts – we think 10% is likely.

If real estate prices fall by only 10%, it will not lead to a recession according to Oreana. It would be a ‘welcome chill’ and the RBA can say they have done a good job. It could also help assets like ASX stocks.

Poole went on to say:

The RBA has taken rates close to neutral, but they are not yet restrictive. When the RBA adopts restrictive policies, we expect to see the economy slow down to below-trend growth rates. The unemployment rate will initially stop falling and judging by the rapid cooling of ANZ job vacancies, the unemployment rate will rise. Slightly higher unemployment will reinforce the RBA’s pause and prolong the cycle, delaying the recession for a while.

When will the RBA stop raising interest rates?

Poole pointed out that the RBA had damaged its credibility by saying interest rates were unlikely to rise until 2024.

But, after the recent policy pivot, the RBA’s interest rate is “now heading towards tight monetary policy.”

Poole wrote:

We expect the RBA to pause in slightly restrictive settings, allowing the Australian business cycle to extend into 2023.

Australian property prices will correct but not collapse in this environment. Importantly, strong economic momentum can extend the business cycle into 2023, preventing a recessionary environment. And in this scenario, Australian investors will benefit from exposure to both Australian equities and Australian government bonds.

The end of market uncertainty over rising interest rates could be a positive for the ASX equity market. However, I think it is worth pointing out that it is unclear at what rate the RBA interest rate will settle at in the longer term, which has an influence on the valuation of ASX shares.