Investment Outlook for 2023

During the recent summer holidays, as usual, I worked through the financial reports released by most of the large investment houses outlining their outlook for the new year. This year there were definitely more themes that these investment companies agreed on, and I found that the golden thread that tied all these reports together was the idea that this may be a year the hasty hare could very well be beaten by the slow and steady tortoise yet again.

Because 2023 adds up to seven (2+0+2+3), I decided to discuss seven topics that really stood out in these reports, and I will briefly cover them to help investors to position their investments with the challenges for  the rest of this year in mind.

1. Global bonds

This was definitely the most interesting change in opinion compared to the outlook for 2022. Most of these investment companies had a very negative outlook towards global and US Bonds in 2022, and it was quite striking to see that most of them now have a positive outlook for 2023. The overwhelming opinion is that most countries have now moved towards the end of the rising interest rate cycle and that the bad news has now been factored into bond prices. Credit Suisse said: “As for financial markets, as inflation peaks and monetary policy reaches restrictive territory, fixed income should become more attractive again”.  J.P. Morgan feels that all the negative news for 2023 has already been priced in and stated that “both stocks and bonds have pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive, and we are more excited about bonds than we have been in over a decade”.

We know that the US 10-Year Yield, for example, is still trading at the highest levels seen in more than a decade, but we should always be aware of the fact that rates traded at the lowest levels seen in 50 years between 2010 and 2020. With the great optimism that most of these investment companies are looking at global bonds, you shouldn’t necessarily disregard this fact.

Graph 1: US 10-Year Yield (Source: TradingEconomics.com)

2. Economic growth and recession

Not all companies agreed on this topic, but the general view was that if the USA did enter a recession this year, it would be swift and less intense. Citi Global Wealth said that “in the US, we expect a mild recession, with regions such as the eurozone being more heavily impacted”, which falls in line with Wells Fargo’s opinion that they “expect the U.S. and global economies to face a moderate recession through the summer in 2023 followed by a second-half recovery capable of extending into 2024”. Some companies believe the US could sidestep a recession altogether, such as Goldman Sachs, which reported that “The US should narrowly avoid recession as core PCE inflation slows from 5% now to 3% in late 2023 with a ½pp rise in the unemployment rate.”

However, most companies agree that the Eurozone and the UK will not be able to avoid a recession.

Economic growth may be lower this year, and most investment companies agree that the IMF’s growth forecast of 2.7% for 2023 (in October 2022) will likely not be achieved. Barclay’s forecast is consistent with that of other companies, saying that “2023 may well be one of the slowest years for global growth in decades. Our analysts expect the world to grow at 1.7%.”

3. Inflation

Inflation was another topic that had mixed reviews, but the strongest opinion was that inflation had peaked and could start to drop to lower levels in 2023 but is not likely to reach levels seen before 2020. Deutsche Bank had the strongest opinion: “we forecast that inflation will ease down (but stay well above central bank target levels).”

4. China

China was a topic that every report addressed in detail. While no one predicted a V-shape recovery, optimism regarding China’s opening came through quite strongly. Goldman Sachs stated that “China is likely to grow slowly in H1 as an April reopening initially triggers an increase in Covid cases that keeps caution high, but should accelerate sharply in H2 on a reopening boost”. Morgan Stanley agreed by saying that “as China’s zero-COVID policies begin to moderate, combined with a weaker dollar, that could make China an intriguing equity area for 2023”.

5. US equities

US equities also attracted a very interesting mix of opinions. At the beginning of 2022, several investment companies said that US shares were overvalued and could suffer during 2022, which did not correspond with many other companies that were still very optimistic about US shares. This year that is not the case. Most investment companies are not positive at all about US shares for 2023 and feel that better growth will most likely be found in other areas. HSBC was amongst the minority of companies who stated that they “prefer US over Eurozone and UK”. In contrast, most other companies such as Vanguard maintained that “stretched valuations in the U.S. equity market in 2021 were unsustainable, and our fair-value framework suggests they still don’t reflect current economic realities”.

6. Global equities

This topic brings me back to the tale of the tortoise and the hare. Very few investment companies forecast an excellent start for global equities in 2023, predicting more of a slow recovery towards the end of the year. I think Deutsche Bank captured it best in their report, saying that “2023 is likely to be an acceptable year for equities, but not a great one. Positive returns will be driven by some modest price/earnings expansion and dividends – but earnings per share will be stagnant”. Everyone agrees that volatility is likely to remain high and that investors would have to be patient.

Many investment companies still feel that there are now more investment opportunities in emerging markets. As JP Morgan said: “The broad-based sell-off in equity markets has left some stocks with strong earnings potential trading at very low valuations; we think there are opportunities in climate-related stocks and the emerging markets”.

7. Commodities

There are mixed opinions about which commodities may perform well in 2023. However, the general consensus is that commodities cannot be avoided this year. UBS is of the view that it still has a place in 2023 portfolios, saying that they “see commodities as attractive both on an outright basis and for the hedging role they serve in multi-asset portfolios”. Wells Fargo agreed and elaborated, stating that they “are favorable on Commodities in 2023, as the bull super-cycle is still young”.

Wells Fargo also shares the opinion of many other investment companies that investors shouldn’t be too optimistic about the US dollar, which is something South African investors should consider well before exchanging their Rands for US dollars. They said that “the dollar's 2022 ascent to a 20-year high was gold's most potent negative, but the 2023 flattening and then reversal lower in the dollar's value that we expect should relieve some pressure on gold”.

Most investment companies’ preference still lies with energy and oil producers.

I wish you all an excellent 2023. May this year bring considerably more joy than 2022.