Investors should sleep with one eye open next year - that’s the advice of Shaw and Partners co-chief executive Earl Evans, who expects the economic reckoning caused by rate hikes to arrive in the first three months of 2023.

Mr Evans, whose firm has $28 billion in funds under management in Australia, said the resilience of the sharemarket amid the tighter economy had surprised many veteran market watchers.

“I think that there is not as much leverage as what there’s been in previous boom-bust cycles,” he said.

“There’s an enormous amount of cash sitting there on the sidelines. People that have been around a long time and have seen numerous booms and busts are looking for a correction of sorts.”

Despite that, there are some anecdotal signs of a slowdown coming. Economists and retail analysts expect a slowdown in consumer spending and real wages are thought to stay below inflation, which is set to slowly approach 3.8 per cent by the end of 2023.

Mr Evans, who has been in the industry for about 35 years, said he had noticed some car dealers reporting more vehicles being brought in for sale, while some firms were starting small redundancy rounds.

He said the larger workforce cuts in the tech sector were also likely to spillover at some point.

“The first quarter of next year, we will start to see some of the results of the rate rises come through and I think that transfers through to the market,” Mr Evans said.

“My gut tells me, having been through this sort of thing three of four times in my working career, the bounce-back that’s occurred over the past four to six weeks is probably a little bit of a dead cat bounce — but the first half and first quarter of next year will be a bit of a reckoning.

“(It) won’t be a bloodbath, there’s too much money on the sidelines that can catch the fall, but it has to be a little bit of a wash out.”

The advice for investors is to stay alert to the broader economy next year given the surprising post-pandemic rebound has made many feel overly comfortable.

“Sleep with one eye open is my advice. I think 2023 will be a challenging year and I think people really do need to be a little bit wary,” Mr Evans said.

“Be a little bit on the cautious side. Massive rate rises to curb inflation are a blunt instrument, which means the results can creep up and come out very, very quickly.

“Seek really good advice, the best advice you can, and double check it. Don’t be in a rush.”

Mr Evans — speaking during a recent visit to Perth for his firm’s WA Race Week ocean paddling event — said interest-rate sensitive stocks like the property and infrastructure sectors had already gone through a correction, so some value was there.

The more pressing concern, he said, was the impact on commodities stocks given China’s continued reduced demand.

But he said though there was general uncertainty around China’s next move, it would be unlikely many would be “short” on resources stocks given their general performance.

In energy, he said, stocks like Woodside would continue to perform while the Ukraine conflict persisted.

“They’ve got a good footing and foundation, they’ll continue to press on pretty solidly,” Mr Evans said.

Article source: West Australian, 5 December 2022