Shifting Markets

Shifting Markets

COUNTERPOINT OUTLOOK 2023
INTRODUCTION
A year of (almost) two halves

Daniele Antonucci
Chief Economist & Macro Strategist

Financial markets have been dominated by rising interest rates over the past year as the world’s major central banks continued to focus on taming persistently high rates of inflation. Their efforts to apply the economic brakes are working, with the euro area and UK likely beginning 2023 in recession. The US economy is also likely to contract at some point, although less severely. 

This prolonged high inflation was partly driven by disruptions to Russia’s supply of oil and gas to Europe owing to the Ukraine War, which pushed up energy prices. This headwind is likely to continue in the first half of the year. Another drag on the world economy has been China’s zero-Covid policy. A series of prolonged lockdowns affected manufacturers and their suppliers, which has caused the country’s exports to fall. But with China now looking to relax its Covid-restrictions, we could see growth pick up again. 

Markets in transition
We believe conditions will start to improve from spring as the interest rate hiking cycle ends, inflation slows more visibly and China’s reopening progresses. These shifts are likely to trigger a new global economic cycle, with the key regions expanding at their own speeds. 

With markets set to go through this transition over the next year, we believe investment strategy at the start of 2023 is less about whether to increase or decrease risk in portfolios, and more about focusing on positions within key asset classes and regions. Having said that, unexpected events can appear that cause large shifts in investor sentiment (as clearly shown in recent years) so we’ll be monitoring markets for any catalysts that would give reason to change our approach.  

BACK TO THE TOP
Following one of the most challenging years in decades, the current cycle is ending and a new one is likely to begin, paving the way to a new investment environment.

INVESTMENT FOCUS

As one cycle ends, another begins


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.

house icon


Inflation peaks
then moderates 

hammer icon


Central banks
stop hiking 

graph icon


China’s economy
picks up


Source: In-house research, Refinitiv; note: dotted line = own forecast.


MORE ON THESE SHIFTS BACK TO THE TOP

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.

OUR INSIGHTS

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.

Read more >

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.

Read more >

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.

Read more >

BACK TO THE TOP

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.

PORTFOLIOS

Our portfolio positioning

We are starting 2023 with a combination of equity and fixed income exposures. These positions reflect our outlook for markets over the next 12 months. However, we are mindful that the investment environment is an evolving one and conditions can soon change. So, we are ready to adjust our positioning if our views on the economy and monetary and fiscal policies change. 

Moving the dial on risk
What would it take for us to increase and reduce risk more generally in portfolios? All else being equal, here’s what we’d do:
  • Increase risk if inflation, interest rates and bond yields fall more rapidly than expected, the Ukraine War ends, or China reopens quickly.
  • Decrease risk if central banks overtighten monetary policy, there’s a further inflation spike due to energy and wages, or – apart from an always possible black swan – the tensions between Russia and Ukraine and/or China and Taiwan deteriorate.
Read more about our portfolios
Equities
Not time to re-risk yet

Our overall equity exposure is still slightly underweight. Although stock markets picked up at the end of 2022, we do not think it is yet the time to increase exposure to risk in our portfolios…

Not time to re-risk yet
Credit
Corporate bonds: add high-quality, reduce low-quality
Our exposure to corporate bonds is neutral after being overweight previously…
Corporate bonds: add high-quality, reduce low-quality
Government bonds
Government bonds

We have increased our overall government bond exposure to reflect our views on the global economy, moving from underweight to overweight. We expect further declines in bond yields over the course of 2023 as inflation continues to decelerate and market expectations shifts towards central bank rate cuts…

Read more about our portfolios

Government bonds
Cash & gold
Cash & gold
Peak rates suggest the dollar may benefit less from here – as the Federal Reserve is no longer outpacing other central banks. This takes away a key driver of past dollar strength. A less risk-off environment as the year progresses should also contribute to some moderate dollar weakness… 

Read more about our portfolios
Cash & gold




BACK TO THE TOP

This document is designed as marketing material. This document has been composed by Quintet Private Bank (Europe) S.A., a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg, registered with the Luxembourg trade and company register under number B 6.395 and having its registered office at 43, Boulevard Royal, L-2449 Luxembourg (“Quintet”). Quintet is supervised by the CSSF (Commission de Surveillance du Secteur Financier) and the ECB (European Central Bank).
This document is for information purposes only, does not constitute individual (investment) advice and investment decisions must not be based merely on this document.

Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment) decisions based on this information are at your own expense and at your own risk. It is up to you to (have) assess(ed) whether the product or service is suitable for your situation. Quintet and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document. All copyrights and trademarks regarding this document are held by Quintet, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Quintet. See the privacy notice on our website for how your personal data is used (https://group.quintet.com/en-gb/gdpr).

The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document.

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Any projections and forecasts are based on a certain number of suppositions and assumptions concerning the current and future market conditions and there is no guarantee that the expected result will ultimately be achieved. Currency fluctuations may influence your returns.

The information included is subject to change and Quintet has no obligation after the date of publication of the text to update or inform the information accordingly.

Copyright © Quintet Private Bank (Europe) S.A. 2022.All rights reserved. Privacy Statement

Contact us