“East and West: From economies to markets, an asymmetric world?”

Please click below to watch a short video summary of our Outlook 2023, presented by Moz Afzal, Chief Investment Officer, and Daniel Murray, Deputy Chief Investment Officer.

Inflation will remain the dominant theme for markets in 2023. Although base effects across major advanced economies will help bring down inflation rates, EFG’s investment experts and economists believe this will become more evident only in the second half of the year. In 2022, the surge in oil and natural gas prices, rising transportation costs and supply chain bottlenecks drove up inflation. Looking ahead to 2023, there is optimism that the reversal of these trends will dampen inflation despite rising wages.

In 2023, global economic growth is likely to be moderate and, according to EFG’s experts, a recession will be unavoidable in the UK and the eurozone, with Germany being hit hard by the weakness of China's economy and the Russia-Ukraine war. However, EFG anticipates that if the US goes into recession, the downturn will be mild. In contrast, emerging economies are expected to recover, with China returning as a driver of global growth thanks to the easing of covid restrictions and the stabilisation of the housing market. Monetary policy will reflect the asynchronous cycles in developed and emerging economies, with a pivot towards a more supportive stance in the former and less stimulus being given in the latter.

With China's recovery on the horizon, EFG’s investment experts and economists see a significantly better year ahead for both emerging equity and bond markets in 2023. This upward trend in emerging markets would be reinforced by a weaker US dollar, as EFG believes the currency will be softer in 2023 after a period of significant appreciation over the last 10 years.

Among developed markets, Japan is a prime example of an economy where corporate profits can rise strongly despite weak economic growth, thereby supporting local equities.

Looking at fixed income markets, EFG believes investment grade bonds appear to offer an attractive return/risk profile compared to government bonds or high-yield debt, potentially providing a ballast for portfolios for the coming year. In the US and UK in particular, investment grade bonds appear to offer a better return/risk profile than either government bonds or high-yield debt.

Moz Afzal, Global Chief Investment Officer at EFG: “After years in which emerging equity markets have underperformed compared to developed markets, we see the potential for a much better year ahead for both equity and bond markets in 2023. Generally speaking, valuations in bonds and equities are now much more appealing than they were at the beginning of 2022, so forward-looking returns could be more attractive. Over a three-year horizon, the major asset classes are expected to generate reasonable returns. Furthermore, counterintuitive as it may seem in the current economic climate, we believe Consumer Discretionary stocks will rally in 2023. As inflation eases, coupled with resilient wages and excess savings from the last 3 years, the consumer, we believe, will remain relatively resilient not just in the US but globally. This, paired with the improving valuation of consumer discretionary stocks suggests to us that the sector is primed for out-performance.”

Stefan Gerlach, Chief Economist at EFG: “With lower growth and lower inflation, central banks could soon stop raising interest rates. However, central banks are in a difficult position: On the one hand, the massive interest rate hikes they already implemented have not yet fully impacted their economies. This is likely to change as the peak effect of monetary policy on the economy materialises with a delay of perhaps four quarters. On the other hand, inflation is still far too high. The likely outcome of this balancing act is that central banks will continue to raise rates, but at an ever slower rate, until the end of 2022 or possibly the end of the first quarter of 2023. They are also likely to start reducing the size of their balance sheets.”

Overview of the EFG’s top-ten convictions for 2023:

1. Inflation (finally) subsides: Inflation rates will, finally, come down in the main advanced economies. The US rate will be most closely watched. We see it at 3% by year-end.
2. Geopolitical tensions ease: Geopolitical tensions should ease in 2023, helping economies and asset markets.
3. Global growth: back to reality: After sharp gyrations in economic growth rates during the pandemic and its aftermath, 2023 will be a year when we return to reality.
4. Japan: renaissance continues: Japan is the prime example of an economy that can grow corporate earnings strongly even with weak economic growth. We see the renaissance of the corporate sector continuing.
5. Emerging economies recover: A recovery in China and Europe and a strong Japanese economy will help emerging economies, not just in the rest of Asia, but further afield.
6. Weaker US dollar trend: The US dollar has trended upwards for a decade or more. It reached overvalued levels in late 2022. 2023 will be a year of correction.
7. Bond vigilantes on patrol: The bond market vigilantes brought a quick end to the UK’s attempted fiscal largesse in 2022. They will remain on patrol in 2023.
8. Investment grade bonds: Investment grade bonds look attractive in a still uncertain world.
9. Global small caps: We see good opportunities in the global small cap sector.
10. Consumer discretionary sector: Our ‘contrarian’ sector view is to favour consumer discretionary stocks

Download the full EFG’s 2023 Outlook publication here.