23 Thoughts on Investing and Personal Finance for What’s to Come in ’23 – Yahoo Canada Finance

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23-predictions-gs1229

As we entered 2022, I shared 22 financial thoughts for 2022. It turned out that they were mostly accurate, with one meaningful exception. I predicted an increase in interest rates and inflation, but, like many others, the increases exceeded my more modest expectations. Looking to 2023, interest rates and inflation will once again be key to our financial future, so let’s start there.

Inflation will decline slowly and fairly steadily in 2023: We will probably return to the three to four percent range by the end of the year in Canada. The declines may not be as fast as we hope, but the decline in inflation will be welcomed on many fronts and will certainly ease some of the pressure on interest rates.

Expect the first rate cuts at the end of 2023: Interest rates are nearing their peak from a central bank perspective, and while they may not fall for a while, I expect the first declines in late 2023. This is slightly earlier than the Bank of Canada currently indicates. Unfortunately, it won’t provide instant relief to those with variable rate mortgages.

Five-year fixed mortgage rates are not falling; they can even rise: From a bond market perspective, five-year yields are unreasonably low given the rest of the market. While my earlier thought was about Bank of Canada rates, we believe that an upward adjustment in five-year bond yields is needed to normalize the yield curve relative to the inverted yield curve we have today. We expect this to happen in the first half of 2023.

Residential real estate will fall and then rise: Economic fears don’t make big financial decisions like buying a house easy. Between higher mortgage rates than many have seen in a lifetime, some anxiety around employment, and those who may have to sell due to lost jobs, I see a weaker market in early 2023. That said, immigration targets of 465,000 people will be very supportive of the overall market, and I expect a small home repair later in the year.

Rents go up first, then maybe down: Increased demand from greater immigration coupled with those unable to afford to buy anything will continue to push rents into early 2023. weaker. The practical implication is that some people will adapt to this, leading to more people per house, either because children live longer at home or because people add roommates to pay the rent.

recession? Yes, but manageable: It seems pretty clear that central bankers’ efforts to curb inflation will curb growth. The technical definition of a recession—two or more consecutive quarters of negative growth—is likely to happen. Nevertheless, high immigration rates and the possible support from lower interest rates should keep us out of a major recession.

Unemployment will rise: Recessions lead to lower incomes and higher unemployment. Together with a higher number of people looking for work due to immigration, we would expect the unemployment rate to rise to more than 6% by the end of the year, from 5.1% today.

Working from home is reduced: The trend of working from home isn’t going away, but there’s nothing like a recession and higher unemployment to motivate employees to do what their company demands. When budget cuts are looming and you’re asked to work from the office four days a week, you don’t want to be the one to say no.

Pensions will be postponed: Many people approaching retirement age want to continue working because rising inflation is a legitimate concern. The increased ability to work from home has also made the decision to expand work somewhat easier for many. Given some of the low employment rates we’ve seen, many employers are more than happy to accommodate additional years of work from older workers.

Government pension benefits will be significantly higher: This is not so much a prediction as a fact that has not received much attention. Inflation has a number of benefits for retirees, as government pension payments will increase by 6.3 percent in 2023. Canada Pension Plan (CPP) and Old Age Security (OAS) payments are linked to inflation, so if you can maximize those benefits, you could get as much as $24,000 combined by 2023. And OAS benefits are slightly higher still for those age 75 and older.

Inflation means higher tax thresholds and OAS clawback limits: The OAS clawback kicks in once personal income is $86,912 in 2023, as opposed to $81,761 in 2022. This may provide more planning opportunities to capture more OAS. In addition, the top federal tax bracket will be increased from $221,709 to $235,676, along with smaller increases at all tax bracket levels. There may be some additional plans in 2023 to take advantage of these changes.

Energy costs will become increasingly dependent on China: I believe oil and natural gas prices will not fall significantly in 2023, but China’s emergence from COVID-19 restrictions could support strong energy demand. China is always hard to predict, but it seems likely that China will follow the rest of the world in easing COVID-19 restrictions meaningfully over time. This will be the biggest price driver in 2023. Of course, an ongoing conflict in Ukraine and Russia could also provide some price support.

Metals and materials will recover in 2023: After a major decline in the last eight months of 2022, China will support growth in metal and material prices. This will be critical as a global economic slowdown will move prices in the opposite direction. Overall, we think the recovery in Chinese demand will last the day.

The loonie remains at the lower end of its seven-year range: The Canadian dollar has traded within a few cents of 76 cents for most of its time since 2015. One of the main reasons will be that the United States ends up getting higher interest rates than Canada.

Ukraine and Russia will continue to raise risks: We would of course like to see a resolution of the conflict, but there does not seem to be a clear route at the moment. This poses challenges to many markets, such as energy, wheat and uranium. Unfortunately, the ongoing conflict is likely to lead to continued supply issues in these markets and result in higher than normal prices.

Bitcoin will survive, but probably won’t see a meaningful recovery: Last year I didn’t even want to comment on bitcoin. With the current FTX debacle, government regulation will become much stricter. Smaller cryptocurrencies may not survive, and the biggest names will have to survive under much tighter scrutiny, going against the prevailing culture of independence. I think it’s called growing up.

Cannabis stocks need US legalization and it probably won’t: The window may have been open to cannabis legalization in the US in recent years, but it was clearly not one of President Joe Biden’s priorities. That doesn’t seem to have changed. As a result, it will be hard to see real gains in this space.

There will be an increasing demand for financial and estate planning: As uncertainty about the economy and inflation increases, there is more concern about our own financial future and that of our children and grandchildren. We saw this in 2009, and many Canadians in 2023 will be looking for those who can offer more guidance, financial peace of mind and tax minimization strategies.

Canada will once again outperform the US markets: U.S. markets largely outperformed Canada for a decade through 2022. However, from 1999 to 2010, Canada vastly outperformed the US, suggesting long-term trends. With the rose blooming of high-growth tech stocks, a return to better value and a recovery in resources, the upside for Canada looks likely to continue. We also expect Europe to do better as the current overall picture is too negative today.

Large-cap, profitable and good cash flow stocks will be the place to invest: They will benefit from investors’ desire for stability and the ability to use their capital to target those who need to raise money (see Royal Bank of Canada’s purchase of the Canadian operations of HSBC Holdings PLC.)

Bonds will perform much better: Bonds had a historically bad year in 2022. But the fundamentals are different today. It is possible to find returns of five to seven percent. We don’t expect much help for bonds in 2023 from rate cuts (probably more help in 2024), but the much higher initial yields will help overall returns.

The healthcare crisis is leading to more expenditure on the sector: I don’t pretend to know the right medicine for a Canadian healthcare sector that seems to be bursting at the seams. But I think there will be a lot of political pressure on governments to invest more in different resources to support the industry. Also expect Canada to keep it relatively easy to get approved for medical assistance in dying (MAID).

2023 will show a better total return: It may be a bumpy ride and low hurdle, but higher income returns will support balanced portfolios in a way we haven’t seen in 2022. In addition, the flattening of interest rates will help. A recession will hurt earnings, but we generally expect significant improvements in returns.

May the coming year bring a better world and a better return.

Ted Rechtshaffen, MBA, CFP, CIM, is president and wealth advisor at TriDelta Financial, a boutique asset management firm focused on investment advice and financial planning for the high net worth. You can contact him directly at tedr@tridelta.ca.

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