Australia’s gross domestic product (GDP) grew a strong 5.9 per cent in the year to September, this week’s ABS data showed, with the economy rebounding from last year’s Delta lockdowns.

But Reserve Bank of Australia (RBA) forecasts have economic growth slowing a lot over the course of 2023 as the lag effect of rate hikes hit home borrowers and spending decisions are put on ice.

The central bank on Tuesday increased the cash rate to 3.1%, the highest in a decade, and forecasts GDP will decelerate to around 1.5% in both 2023 and 2024.

Better bonds year coming in 2023

One asset class likely to fare better in the year ahead is government bonds, which typically thrive in a slower growth environment.

Bond yields have already factored in higher inflation and the worst of the price losses might be over, CommSec chief economist Craig James said.

“If the RBA is successful in their strategy and growth slows and inflation falls, then the government bond market has scope for gains,” he says.

That sentiment is shared by Kellie Wood, who is head of fixed income at Schroders. Ms. Suss is betting there is a 60% chance of the US tumbling from growth into recession next year, which will suck bond yields worldwide lower, and drive bonds higher next year.

“2022 was the year to be out of fixed income, but the year to be in fixed income will be 2023. Next year, we expect both government bonds and corporate bonds to make gains,” Wood says.

“Conducting war on inflation at home, central banks will engage instead in war on recession in their own economies.”

She added that a very abrupt shift in the outlook for interest rates will pull bond yields lower and create ‘attractive’ fixed income returns for investors.

“This macro backdrop should be supportive of higher quality assets such as government and high quality corporate bonds,” said Wood.

“Our three-year expected returns for Australian governments are circa 3.5% per annum, and Australian investment grade credit at circa 5% per annum.

Equities, by contrast, may suffer as rising interest rates and a slowdown in economic growth take a bite out of profit growth. But there are exceptions to that, analysts say.

Defence supplied by telco and supermarkets

Key quotes from analyst Brian Han Telstra's (TLS) performance amid the pandemic reinforces just how resilient its earnings and balance sheet is going into this period, comments Han.

Telstra is regarded as a defensive stock because it is not reliant on economic growth for its earnings.

“In all service categories and customer segments, Telstra has questionable overall market dominance, as well as cost advantages that form the basis of its narrow moat rating,” Han writes.

“With competition intense, shares of the mobile market should show some resilience.

Telstra is now trading in line with $4.20 fair value estimate.

And people need to eat, no matter how fast the economy is traveling.

"But Coles (COL) and Woolworths (WOW) are facing very strong competition from Aldi, which will push profits down."

"We see near and medium term impact on the supermarket majors of market shares and returns margin to be soft but longer term competition could push industry returns margin structurally lower, notes Mr Faul.

WINNERS: Higher energy prices could be good for some commodities

Diana Mousina, a senior economist at AMP Australia, says recovering energy prices should provide some support for commodities in 2023.

“Commodities broadly should perform well next year because of years of underinvestment, particularly within energy which should see energy prices stay higher than usual, albeit lower than this year,” she says.

“Sanctions on Russia [will] remain in place which will add upward pressure on prices, [while] the transition to net zero will be broadly supportive of some commodities such as metals and hydrogen.

“But there will be pockets of differences I like gold, that looks like it may well perform a bit better, because it has been a recent underperformer but on the whole, oil doesn’t do so well in a lower growth environment,” she added.

“Local equities would do well relative to US shares I think, I think rates will go up more in the US than here relative to Australia,” Ms Mousina said. She expects US economic growth to be weaker and at a higher risk of recession.