Without a doubt, 2022 has been a tough year for most investors. As of writing, the ASX200 is down around 6% and the S&P/ASX Small Ordinaries is down nearly 19%. Additionally, the Nasdaq is down 32.3% year to date and the S&P 500 is down 19.1% . ​

However, right now it is critical to avoid falling prey to anguish and fear. For long-term investors, take heart that history is on your side and the probability of 2023 being a good year continues to rise.
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Before digging into specifics, let’s talk about the battle for attention in the finance world. In investing, bullish optimism can often sound like reckless cheerleading, while bearish pessimism sounds like a critical mind who has dug deeper than the headlines.

In investing, optimism reads like a sales pitch, while pessimism comes across like someone trying to help you. Sometimes, that is the truth.Yet, optimism should be the correct default setting when it comes to equities. Don’t forget the fact that, despite depressions, recessions, world wars, crises, pandemics and everything in between, if you invested just $1 in the S&P 500 at the beginning of 1900, you would have about $87,941.88 at the end of 2022, assuming you reinvested all dividends.

This is a return on investment of 8,794,087.70%, or 9.71% per year.

So, whilst disappointed in the past year, we are avoiding extrapolating single-year performance over the long term – if we did, investors from 2021 would be expecting 30%+ annual returns and 2022 investors would be losing money till it’s gone!

Our view has been consistent for the last few months and we have not changed it now. We believe the US economy is deteriorating fast and the Fed will change its tune come March next year. We expect the Fed to pause its rate hiking cycle around that time. On the back of a worsening economy, we also expect markets to begin pricing in a rate cut later in the year. Historically these types of environments sees markets rally in anticipation.Looking at our Australian equity portfolios of mostly small caps, valuations look attractive. In Australia, small caps have underperformed large caps by 20% this year, and in the US, small caps are trading at record-low valuations. From a historical point of view, these tend to indicate great buying opportunities. We are confident that small caps will outperform next year and see the next few months as good buying opportunities.

We also expect M&A activity to continue, with the Australian portfolios seeing more takeover activity in November. MSL Solutions received a bid at a 90% premium and Mayfield Childcare is seeing a takeover battle emerge at a 35% premium to the prevailing price.

We are now firmly of the view that the worst is behind us and although markets will continue to be volatile in the first quarter of 2023, we expect an overall strong performance during the year.

Of course, nobody can successfully forecast what next year’s return will be. History, however, suggests with each negative year, the odds of a better subsequent year improve.

All the best,
Ron Shamgar