Will 2023 be the year your shares go nowhere?

Looking ahead to 2023, Morgan Stanley expects the market to be lower than its current level.

If you have any interest in the sharemarket you’re probably feeling pretty good this weekend. There’s the ASX 200 at 7260. Not bad at all. We might finish the calendar year flat, which would be a lot better than anyone expected a few weeks ago.

The challenge though, is that share investing is all about what happens next. Some of the biggest banks and brokers have now issued their forecasts for 2023. Brace yourselves folks: several key forecasters such as Morgan Stanley and UBS suggest the ASX this time next year will be lower than where we are now.

This should be a call to action to all investors. If you are depending on exchange-traded funds to passively carry you through the year ahead, they are going to let you down. If you have a mixed bag of shares, it’s time to take out the trash, as they say on Wall Street.

But hang on, you say, we just had a pretty miserable year.

Surely, next year the market will rebound?

Sorry to say, the ‘‘best brains in the market’’ believe the recent run up is nothing but an illusion. As Macquarie’s Matthew Brooks put it this week: ‘‘We are seeing the end of a bear market rally, not the beginning of a bull market.’’

Nobody knows what’s going to happen next but it would be a silly investor who ignores the consensus that next year the sharemarket will be tough going.

If you want to know what the wealthiest investors in Australia are being told, then take a look at the Morgan Stanley outlook report. Keep in mind that The Australian’s annual Top 100 advisers list is dominated by Morgan Stanley and its Melbourne partner, Garth Hu, has topped the tables three years in a row.

The Morgan Stanley team says that in Australia monetary tightening is expected to take hold in 2023, with house prices to fall “the most on record’’ along with economic growth declining sharply. In common with several forecasts, the team presents a picture of an economy and a market where the bad news has yet to really hit home: “We remain underweight equities in the short term as the macro environment will likely get worse.’’

Morgan Stanley says the ASX 200 at the end of 2023 will finish near 7200.

At UBS, Richard Schellbach predicts we’ll get to 7250 by the end of next year. That’s a bit better, but still lower than where we are today. Not for the first time the consolation will be dividends and dividend yield should add around 4 per cent for the year.

So assuming share prices effectively go nowhere next year, you will at least get that return for your ­efforts. Why so gloomy? Put simply, the analysts suggest even if we avoid an Australian recession, the recession due globally has yet to be ‘‘priced in’’.

In fact our sharemarket is doing relatively better than overseas markets but that is of little consolation or consequence to most domestic private investors.

If you put these various forecasts together from the bearish 7200 at Morgan Stanley to the bullish – 7600 at AMP – the list of concerns is clear.

The brokers are most worried about earnings – that is, the profits from our major companies will not be as good as widely expected.

There is also a common ‘‘call’’ that in the first half of next year we are going to get another serious reversal in the sharemarket and most likely around the time of the earnings season when the big companies report their annual results.

On that basis, the dog days would be in February 2023. Once we get through that patch the consensus is that we will have a sharemarket recovery but it will only take us back to where we are now or a couple of per cent higher.

Better-than-average returns will be all about individual stock performance and which stocks will be best to carry us through in the months ahead.

In terms of ‘‘taking out the trash’’, it should not be difficult for most investors to identify the stocks where it’s time to give up. There will be plenty of them, especially in the small to mid-cap sector where promises related to post-lockdown rebounds should have played out by now.

As Macquarie’s outlook explains: ‘‘In 2022, the outperformers have been late cycle outperformers and inflation hedges (energy, utilities, banks, insurance, mining). Based on past cycles, it’s unlikely late cycle cyclicals keep outperforming once a US recession starts, as they face higher earnings risks.

“Defensives and quality stocks are more likely to outperform in the early contraction phase, especially if bond yields fall.”

Or to translate that from broker speak, the miners and banks that saved your share portfolio performance this year can’t be expected to do so again in 2023.

Usefully, Macquarie runs model portfolios for its private clients and the most recent note from that team offers a detailed plan for riding out the rough road ahead. As you might expect the team says watch out on resource stocks. Among the ‘‘deletions and reductions’’ in the model portfolios are Woodside and BHP, South32 and even Pilbara Metals.

Maquarie also goes as far as to suggest you lighten up on finance stocks too – in the sin bin are ANZ, NAB, Suncorp, IAG and proxy-bank Computershare which benefits from rising rates due to its float of customer money. For those looking to pick up some robust blue chips, two stocks feature prominently not just at Macquarie but in several forecasts for the year ahead – CBA as the quality bank stock and Transurban as the quality infrastructure stock. That pair are invariably joined by health blue chips CSL and Ramsay Health care. Other regular favourites are Woolworths and gas pipeline company APA.

So what did the brokers say last year? They thought the market would lift by up to 10 per cent and they were quite wrong about that.

Next year they say we will go nowhere; let’s hope they’ve got that wrong too.