How our worldview is changing
With inflation declining and central bank interest rates reaching their peak part way through 2023, high quality fixed income becomes attractive. Emerging market equities, helped by a relaxation on Covid restrictions by China, are also strong portfolio diversifiers alongside high-dividend, low volatility US equities.
The global economy: peaks, pivots, and pickups
We expect the current cycle of weak growth and rate hikes to continue through the first three months of 2023 and into the second quarter. A new cycle should then start, which we believe will be characterised by three major shifts.
Source: In-house research, Refinitiv; note: dotted line = own forecast.
HOW OUR WORLDVIEW IS CHANGING
Markets: fixed income attractive, adding equity diversifiers, slightly weaker US dollar
High-quality bond markets finally look set to do what they’re supposed to: provide a source of diversification in multi-asset portfolios. They’re not just about other sources of return, but also about protection against falls in equity markets, especially government bonds. As the end of the interest rate hiking cycle approaches, bond yields should fall (meaning prices would rise).
We don’t think it’s time to re-risk portfolios so keep our equity position marginally underweight. Alongside an increased bond exposure, this should mitigate downside risks if equity markets sell off. Within our equity allocation, we reshuffle our exposure out of quality growth and into high-dividend & low-volatility equities.
Key macro & market views
The US economy appears relatively resilient
We believe US inflation has peaked, and following a poor performance in 2022, the high-quality US equity market will come to the fore in 2023. US Treasury yields are also attractive given the economic deterioration we expect in the first part of the year.
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A recession is likely in the euro area
We believe that, unlike the US, inflation in the euro area is yet to peak, which means the European Central Bank may need to continue increasing interest rates. Bond yields should then begin to fall in both the euro area and the UK, where we expect similar dynamics.
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Attractive valuations across emerging markets
China’s economy is a key driver of growth across emerging markets, and we believe the Chinese government will stimulate its economy in 2023 and buck the weak global growth trend. This is why we believe emerging market assets, both equities and hard currency sovereign debt, could perform well in 2023.
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As we move into 2023, we believe the
outlook for the dollar is one where it weakens slightly,
allowing central banks across emerging markets
to stop hiking interest rates.