What To Expect In 2023?

Economic growth is anticipated to fall below trend to 1.8% in 2023 as a result of aggressive financial conditions tightening and restrictive monetary policy in 2022. Investors may be underestimating the US economy’s resilience, which contrasts with the European Union’s modest recession and China’s rocky reopening.

Prices are projected to gradually decline, with significant gains in the crucial for policy areas of housing and wages. The performance of supply chains has improved, and if China adopts a more adaptable COVID-19 approach, additional improvements are possible. However, wage growth and long-term inflation expectations will probably play a major role in monetary policy going forward.

Sticky inflation still tops the list of concerns for the entire world, forcing central banks (CB) to adopt a pause-over-pivot bias in 2023. As a result, CBS is eager to suppress growth below its potential. GIR anticipates a terminal rate of 5-5.25% in the US and no reductions in 2023. Terminal rates in the Eurozone and the UK might be as high as 3.00% and 4.50%, respectively.

Acute geopolitical forces are still very much in play, as evidenced by the conflict in Ukraine, China’s expansionist policies, and the persistent polarisation of society. On the latter, we anticipate growing ambiguity in the structure and direction of the government.

The transition from highly divided macro to profoundly idiosyncratic determinants of return should be accelerated by rising capital costs. We think a focus on profits over revenue, quality overcapitalization, and firm over the country is warranted to compete with appealing cross-asset opportunities. A US equity tilt seems justified because the current economic uncertainties are still unresolved, but in 2023, non-US equities may start to show their appealing cyclicality and potential FX tailwinds.

The combination of weak growth and a substantial tightening of financial conditions presents a difficult situation for EM equities. However, we think there may be value in EMS countries like Brazil, Chile, and Korea that are closer to experiencing a respite from inflation and rates.

Global yields are probably going to move in lockstep with CB policy directions, with possible regional energy exposure-related divergence. Although acknowledging the upside risk given policymakers’ inclination to overshoot, GIR predicts rates will peak in the first half of 2023. We anticipate having passed the deepest level of curve inversion globally.

Although credit fundamentals have peaked, they are still stable. US corporations could widen their spreads much further, but prudent capital management, a low debt maturity wall, and cash-rich balance sheets might function as barriers. Despite attractive valuations, policy and energy uncertainty present challenges in Europe.

Given the downside risk to global economy, the US dollar’s gain in the near term might continue. The US dollar appears to be vulnerable to high valuation and a global recovery over the long run. The USD is probably going to lose some of its recent gains if the global growth-inflation mix improves.

The structural problems with supply are the result of years of underinvestment. While variables like rising real rates, a strong USD, and recessionary worries may cause weakness to continue, longer-term physical tightness will be difficult to alleviate.