2023 Global Macro Outlook

2022 was the worst year for a 60/40 balanced portfolio since the 1930s. Therefore, what do we think about 2023?

How bad will any potential recession be?

In short, we forecast a moderate, not deep recession in developed economies. The Eurozone and UK may already be in recession. We see the US entering recession in 2Q 2023. Japan is also likely to be in recession in 2H 2023. On the contrary, we forecast a rebound in China GDP growth to 4.5% amid post-Covid reopening. The silver lining is the majority of the rate hikes are behind us. In addition, this is one of the more anticipated recessions in recent history.  

When will inflation peak?

We expect inflation in the US and Eurozone to decline gradually to around 3-4% by the end-2023. Our forecast of the Federal Reserve’s last rate hike will be another 50bp in February 2023 with terminal Fed funds rate at 5%. For the ECB, we expect rate hike by 75bp in 1Q 2023 with terminal deposit rate at 2.75% and refi rate at 3.25% by end-1Q 2023. We expect both central banks to pause for the rest of 2023 and start to cut rates in 2024.

How to position?

Our advice we are moving from Tina (there is no alternative) to Tara (there are reasonable alternatives)!: Yields from US Treasuries and US investment grade bonds are now higher than US equity dividend yields in general, the first time since 2004. We upgraded US Treasuries and Investment Grade bonds from neutral to positive in October 2022, which coincided with the recent peak in yields post better than-expected US CPI numbers. With policy rates probably peaking in 1Q 2023, investors could look to extend duration and in the attractive yields.

With the Fed’s peak hawkishness probably already behind us, this would possibly imply that the peak dollar may also have been seen. Historically, peaking dollar tends to coincide with outperformance in non-US equity markets. Hence, that is an environment that would favour European equities. European economies are likely already be in recession now and oil/natural gas prices are declining, hence many negatives on geopolitical tensions and stagflation are priced in amid significant outflows from the region’s equity markets in 2022.

We believe China will be one of the few major economies growing faster in 2023. Beijing has been relaxing many Covid restrictions recently despite rising number of Covid cases, a game changer for the domestic economy as well as boosting stimulus for the property sector. We expect to eventually see a cyclical rebound in economic data and corporate earnings in 2023, thanks to the pent-up domestic demand. Hence, investors we recommend to continue to accumulate positions in China equities into any volatility.

We remain cautious on US large caps: Despite significant sell-off in US equity markets in 2022, we remain cautious, especially on large caps, due to the following reasons:

1) Earnings risk: Earnings estimates still look too optimistic in the context of recession with 2023 consensus EPS growth at +6.5% for S&P 500 and +11.3% for Nasdaq.

2) Liquidity risk: Despite majority of rate hikes probably behind us, the Fed’s quantitative tightening is on-going which would continue to tighten financial conditions. Furthermore, in spite of the bearish sentiment on US equities in 2022, US ETFs still registered significant inflows.

From bitter to sweet over 2023?

Risk assets in general could remain volatile in 1H 2023 given the uncertainty over the depth and duration of any US, Europe, and Japan recession. A deeper-than-expected recession should see more downside, while a soft-landing would be a positive surprise. Hence, we recommend investors continue with a diversified portfolio including alternatives (private assets, hedge funds, etc.) and focus on value stocks, quality and income. We may be able to see a better for risk assets when the recession is realized/priced in and market starting to look for rate cuts from major central banks. However, any market weaknesses are opportunities to gradually increase global equity exposure, especially to non-US equities, throughout the year as inflation cools.

2023 Themes

2023 Investment Themes. Theme 1 “Looking through the inflation and rates peak” is a macro theme that focuses on exposure to quality credit and non-US assets to play the peak yield and dollar narrative.

As we expect the market to remain volatile in coming months, Theme 2 “Seizing new income opportunities: from TINA (there is no alternatives) to TARA (there are reasonable alternatives)” and Theme 3 “Embracing market volatility” focus on lower portfolio volatility through investment grade bonds, hedge funds and other income-focused equities, structured solutions and private assets.

Theme 4 “Investing in a new era” and Theme 5 “Accelerating energy efficiency” are longer-term structural themes that focus on energy, food and tech security in the new era, and carbon reduction theme. Investors can consider to get exposure through structure solutions that limit the downside while capturing the upside.