Monetary policy tightening brings the US and European economies close to a grinding halt, while in China, the outlook is determined by politics, not the economy. After the valuation reset across asset classes in 2022, we expect a further cooldown in growth and inflation for 2023, which is the right time to lock in attractive yields while looking for assets that will benefit from recovery into 2024 as the year progresses.
The odds are high that 2023 will be about recent trends cooling off on many levels. In economic terms, both growth and inflation rates are likely to slow as monetary policy normalisation takes its toll and some of the pandemic-related constraints in the economy ease.
Given that inflation rates usually lag, we could still use the ‘stagflation’ label for the year ahead. Yet, at face value, there will likely be more ‘stag’ and less ‘flation’, as inflation rates should fall more than growth rates.
We expect the world economy to grow by merely 2% in 2023 after a solid 3.3% in 2022. As the leading global economic indicators suggested, this does not signal a global recession yet, but a significant slowdown is likely. Central bank policy has long lead times until it affects economic activity, but it defies the widespread opinion that central banks can no longer steer the economy.
The importance of central bank policy has instead increased lately. We expect economic growth to decrease further in 2023 before central banks backpedal, leading to more robust growth in 2024.
Why do we not expect a global recession? First, we still see strong employment trends in many industrialised countries, which keep these consumption-heavy economies afloat.
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Second, the regional dynamics are likely to stay wildly divergent. This reduces the odds of a synchronised global recession since, for example, a recovery in Asia could compensate for some softening in the US on a global scale.
Most importantly, the skyrocketing inflation rates in recent quarters should be over soon. On a global level, we expect the inflation rate to cool off from 8% in 2022 to 5% in 2023. While this is still a high number, we expect most of the pressure to be frontloaded — for instance, it should be present relatively early in the year, which means that most of the inflation pressure will start to abate sometime during the first half of 2023.
The reasons for this are that commodity prices should come down again, supply-chain bottlenecks should ease, and the demand pumped up after the pandemic should normalise. Finally, the high levels of prices in 2022 should help inflation rates to ease further.
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Unless another completely unexpected external shock hits the system, inflation pressure should ease markedly in the year’s first half and keep softening slower through the remainder of the year.
Investment conclusions
Against this backdrop, we suggest capturing attractive yields in quality areas, such as high-investment-grade bonds and quality stocks. At the same time, investors should watch out for cyclical opportunities, as markets may start to price in an economic recovery into 2024 as the year proceeds.
While not all cyclical assets may be at a rewarding risk and return juncture, some may get there eventually. For example, we have highlighted some commodity-backed emerging market currencies, copper within commodities, and selected cyclical equities.
Our technical analysis adds opportunities in industrials overall, as well as in financials, healthcare, and biotechnology. In the currency space, fundamental and technical analyses suggest an end to one of the longest USD (US dollar) bull markets in history.
Yet, given the uncertainties around the timing, investors may want to wait for further evidence in terms of yield differentials and currency weakness before outright positioning themselves against the USD. Regarding thematic investing, the sharp repricing of structural growth stocks this year offers investors an opportunity to prepare and position themselves for the next cycle.
We highlight the following as our preferred themes heading into 2023.
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Energy transition: The growth outlook for clean energy and future mobility subthemes is compelling, while cost inflation can be contained. Valuations remain reasonable.
Future cities: Continued public and private investments in digital infrastructure and the circular economy bode well for future growth, somewhat independent of the cyclical outlook.
Shifting lifestyles: The pandemic premium has disappeared from digital health and genomics, and the focus should shift to chronic diseases. The healthy living trend persists.
Christian Gattiker is head of research at Julius Baer
