Outlook 2023 ǀ Blowing hot and cold
In Short
HIGHLIGHTS:
The new world order is brewing a cold war that marks a regime change likely to see a less friendly growth/inflation mix and a more volatile economic and financial environment. Climate change (hot) will also exacerbate migration issues and competition for natural resources.
Economic growth is set to cool off further, while inflation is still too hot. We warn against inferring market direction from previous cycles and positioning too early for a policy pivot. Policy is more severely constrained in this cycle.
Our core scenario sees a mild EA recession, and an even milder US one. Risks are skewed to the downside: such brutal tightening of monetary policy and financial conditions rarely leaves the economy and markets unscathed.
2022 was bad for portfolio diversification but we expect the bond-stock correlation to fall in 2023 as long-term real yields plateau or even recede. Though rates volatility is set to fall further, we question how long this can drive the risk asset revival. We will start the year with a preference for High Grade Fixed Income, especially UST and EUR IG Credit (including Financials), and a defensive approach on Equities and High Yield. The Fed put will be missing in 1H23 but we see selected EM markets as a good target for those decided to position early for a policy turn.
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BLOWING HOT AND COLD ........................................ 2
MACROECONOMIC OUTLOOK .................................. 8
GOVERNMENT BONDS ............................................. 11
CREDIT OUTLOOK .................................................... 13
EM SOVEREIGN CREDIT .......................................... 15
CURRENCIES ............................................................. 17
EQUITIES.................................................................... 19
ASSET ALLOCATION ................................................ 21
FORECASTS .............................................................. 22
IMPRINT ...................................................................... 24
Structurally hot and cold. If there is one thing that our 2022 Outlook got right, that was in the title: “Bye-Bye beta”. As expected, the surge in real yields led to a rise in the stock-bond correlation – bad for diversification. It was a horrible year for beta, admittedly far worse than we had expected, as the war on Ukraine deteriorated the growth-inflation mix. Russia’s invasion ended two relatively quiet geopolitical decades (first chart). The war has gravely disrupted the energy supply chain, after the Covid pandemic had exposed already the risks associated to global trade interconnections. A greater focus on the supply chain security, rather than its sole efficiency, and new geopolitical risks will likely support some re- and friend-shoring. This will stop or even reverse the globalisation wave seen since China joined the WTO in 2000.
