investment insights

2023: The point of new returns?

2023: The point of new returns?
Samy Chaar - Chief Economist

Samy Chaar

Chief Economist
Christian Abuide - Head of Asset Allocation

Christian Abuide

Head of Asset Allocation

We expect 2023 to be a year of two distinct phases – a recession across major developed economies, followed by a pivot in the cycle that should presage a recovery. The first phase of the year should see the final leg in the upside to rates and in the downside to growth. Stabilisation, and eventually, a recovery to a new bull market should follow.

Macro insights

We expect a tough first half of 2023, with recessionary episodes in major economies including the US and Europe, and unemployment rising.

The cause is of course persistently high inflation and the necessarily aggressive policy response. However, a slower pace of rate hikes in coming months from the Federal Reserve (Fed) in coming months should allow it more time to assess their impact, materially lowering the chance that it overtightens policy – still the biggest risk hanging over the global economy.

Inflation will take time to normalise, especially with services still running hot and the desire of many oil-producing countries to keep oil above USD 90 a barrel. Yet we expect to see clearer signs of US price pressures receding by the second quarter of 2023, and the headline rate falling to 2-3% by year-end.

Inflation will take time to normalise, especially with services still running hot and the desire of many oil-producing countries to keep oil above USD 90 a barrel

We expect weaker demand to see interest rates in Europe peak lower than in the US, at around 2.25% in early 2023, and growth to reach just 0.4% for the full year, supported by a growing fiscal response to the energy crisis. At the same time, Europe’s energy resilience – and transition to greener supplies – is increasing.

In China, we expect a gradual economic reopening in 2023 to provide a material fillip not just domestically, but to the broader global economy and trade. We expect ongoing Chinese monetary and fiscal stimulus in 2023 to continue supporting this transition.

Emerging markets face additional headwinds in 2023, from rates that started rising much earlier than in the developed world – and are now cumulatively much higher – and a stronger dollar. The story is brighter in bigger middle-income countries such as Thailand, India and Indonesia. Large foreign currency reserves, deeper local financial markets and stronger current account dynamics have also made many such economies more resilient than in past downturns.

The story is brighter in bigger middle-income countries such as Thailand, India and Indonesia

Asset allocation

In the short term, synchronised policy tightening amidst a global downturn translates into an unfavourable setup for risk assets, and helps explain the limited relief rallies we have seen so far.

In equities, investor sentiment is weak and valuations have improved to more compelling levels, though are only slightly below long-term averages. However, earnings growth has come under heavy pressure in recent months, and this remains a bigger concern for us. We thus remain cautious on equities for now, favouring value and quality stocks and the healthcare and energy sectors. By mid-2023, earnings and sales expectations will have been cut, and markets will start to focus on recovery prospects. That will present opportunities to add exposure to cyclical and growth names.

By mid-2023, earnings and sales expectations will have been cut, and markets will start to focus on recovery prospects

In credit, our current defensive stance favours global IG over high yield (HY) as we believe spreads for the latter are not yet consistent with a recession scenario. That said, as we move into 2023, and these risks are priced in, rates stabilise and risk appetite increases, this segment will become increasingly more attractive than IG and sovereign bonds.

In currencies, the US dollar has been the unambiguous beneficiary of 2022 macroeconomic dynamics, from rising US interest rates to growing risk aversion. Some structural developments have contributed too. We think these trends can continue into 2023 before an eventual peak and turn in the dollar. At this point, we expect to add to positions in some cyclical G10 currencies as well as in selected emerging markets (e.g. the Japanese yen, euro, Australian dollar and Brazilian real). Until then, we remain overweight in both the dollar and the Swiss franc, both of which exhibit defensive characteristics and strong fundamentals.

To read our full first half 2023 outlook, with macroeconomic forecasts and views by country and asset class, please click on the pdf in the top right-hand corner of the screen.

Important information

This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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