This summary combines the analyses from six global financial institutions—Citi, UBS, Morgan Stanley, JP Morgan, HSBC and BlackRock—to provide a comprehensive overview of the investing environment in 2023.
The insights are grouped in three sections:
The Macro View covering global economic trends and the macroeconomic environment;
Emerging Themes covering key themes and trends that may impact markets in the coming year; and
Asset Allocation recommendations in this environment.
The future is inherently uncertain, and no forecast is infallible. However, by staying informed of the latest trends and attuned to the views of leading experts, investors improve their chances of success and remain ahead of the herd.
We hope this report will help you navigate the investing landscape of 2023.
You should always set aside some money for emergencies or future expenses, such as a vacation or new car. But you only beat inflation by investing.
Investing creates value over time and may also generate regular income. But it also entails risk. The assets in which you invest may rise or fall in value with market cycles and events.
A common mistake that many investors make is that they panic when the market falls and sell their investments at low prices to avoid further losses. Selling during a market downturn causes a permanent loss that cannot be recovered.
Investors should generally take a long-term view and ignore short-term market volatility. In the absence of fundamental factors that impair the value of certain assets permanently, unrealized losses during market downturns are usually recovered when the down cycle ends and growth resumes.
A sound investment strategy begins with a well-constructed portfolio based on your risk tolerance, objectives, time horizon, and financial obligations. A well-constructed portfolio entails allocating assets to diversified investments that are well positioned for long-term growth. If the assets are uncorrelated, losses in any given investment will be offset by gains in others over time.
But starting with a well-constructed portfolio is not enough. The portfolio must be managed actively as the environment changes, replacing assets that have limited potential with more promising ones.
Only one thing is certain. Your wealth will erode over time if you do not invest it wisely.
Economic outlook: US
|BlackRock||JP Morgan||HSBC||Citi||UBS||Morgan Stanley|
The banks present a mix of views, broadly aligning around low positive growth for the US economy in 2023.
BlackRock is alone in forecasting an overall decline in GDP (-2.0%) and is the most negative on corporate earnings, but concedes that it expects house views to change “more frequently” than in the past.
HSBC believes that one or two quarters of negative growth are possible, while Citi points to higher interest rates, a likely 10% decline in corporate earnings, and the possible extension of China’s zero-Covid restrictions as potential drivers.
JP Morgan also maintains that a recession is likely in 2023, but it will be mild. 2024 will return to pre-Covid normality: slow growth, low inflation, moderate interest rates and strong corporate profit margins.
Morgan Stanley points to the robust labor market, which will limit the depth of any recession and speed the ultimate recovery.
Economic outlook: International
|BlackRock||JP Morgan||HSBC||Citi||UBS||Morgan Stanley|
The global outlook is similarly mixed, but the growth trajectory is predicted to be better than the US economy as emerging markets continue their strong run. Citi believes that global growth will suffer initially in 2023 while markets search for signs of an impending recovery.
HSBC provides more detailed insights by geography. It expects the European Central Bank and the Bank of England to raise rates in the continuing battle with inflation.
Higher mortgage rates will impact the housing market, especially that disposable incomes are already challenged by the cost-of-living crisis. As already seen in the UK, governments may have little leeway to spend on relief measures, as government borrowing costs are escalating.
Asian economies are under pressure from a slowdown in demand for consumer electronics. While this is a particular issue for Taiwan and South Korea, Japan has so far avoided the full force of this trend as improvements in the automotive supply chain are helping to bolster its export revenues.
Japan’s resilience is also partly dependent on the relative weakness of the Japanese yen against a strengthening US dollar. But this temporary breathing room is likely to dissipate as currency markets return to equilibrium.
JP Morgan sees a positive story for international markets, with more potential for gain than decline. The difficult economic outlook has already been priced into valuations, but expectations may be overly pessimistic. This means that if the news turns out to be only “less bad,” the effect on prices could be positive.
|BlackRock||JP Morgan||HSBC||Citi||UBS||Morgan Stanley|
All banks see declines in inflation from end-year 2022 levels, albeit at differing speeds.
Morgan Stanley believes a decline in inflation is consistent with a corresponding slowdown in demand and improvements in global supply chains.
While JP Morgan predicts a less steep decline, it forecasts year-on-year inflation as low as 2.6% by Q4—within reach of the 2% target. UBS concurs that this may be achievable by the end of 2023 in Europe and the US, but more volatility could be along the way.
HSBC is the least optimistic, asserting that inflation is likely to remain high through 2023, with more reprieve in Asian countries.
|BlackRock||JP Morgan||HSBC||Citi||UBS||Morgan Stanley|
Most believe that tightening will end some time next year. Some believe it will be as early as Q1 (JP Morgan), some say by mid-year (Citi) and some are in between (UBS).
UBS predicts terminal rates of 5.0%, 2.5%, and 1.5% for the US, the Eurozone, and Switzerland, respectively. BlackRock indicates that pausing will give central banks a chance to gauge the effect of previous rate rises on the economy.
The picture is less clear for rate cuts. HSBC asserts that rates will stay high with persistent inflation. Morgan Stanley (in line with its 10-year Treasury forecast) believes that the restrictive monetary environment will likely remain in place.
UBS believes that rate cuts might be under discussion by year-end, but further volatility may mean high rates staying for longer.
Citi believes that the negative impact of higher US interest rates on the global economy and rising unemployment at home will force the Fed to loosen its monetary policy during the second half of 2023.
China: Growth vs Control
China’s zero-Covid policy has dampened economic activity since its adoption, and investors are keenly observing whether this will continue.
BlackRock predicts that more economic intervention by the Chinese government will put the country on the path to lower growth. Despite a potential global recovery, Chinese assets are riskier.
JP Morgan notes that a slow reversal of Covid restrictions may hamper efforts to lower interest rates further, but Chinese A-shares with exposure to business technology, domestic demand, and energy transition are likely to be the first to rebound.
Morgan Stanley and HSBC concur that easing zero-Covid policies with a weakening US dollar may well make Chinese stocks attractive to international investors again.
Health = Wealth
Given the general uncertainty over the pace of economic recovery, there is disagreement over which sectors are likely to be resilient.
HSBC favors defensive sectors, such as energy and consumer staples globally, healthcare in Europe, and utilities in the US. Blackrock favors financials over consumer staples, but is otherwise broadly aligned.
There is a strong undercurrent favoring sectors that support the megatrend of an ageing population, chiefly healthcare. Citi echoes this view, asserting that healthcare is set to grow faster than the economy for a sustained period, and will exhibit less cyclicality than other sectors, shielding investors from turbulence.
Pharma stocks have historically continued to increase dividends during bear markets, and investors should consider building exposure to more disruptive technology related to life sciences (MedTech, Biotech).
The Sustainable Advantage
All banks touched upon the rising impact of sustainability issues on the behavior of investors, and the prospect of growth in this space.
Morgan Stanley frames the trend as a growing obligation on responsible investors to ensure that the environmental, social and corporate governance (ESG) performance of companies is integrated into their financial analysis of specific securities.
Another bank focused on the commercial opportunities afforded directly by sustainability-related infrastructure projects.
JP Morgan observes that while 2022 saw a hiatus in large-scale ESG-based projects, governments have already committed to further investments in sustainable technology in the coming decade.
HSBC urges investors to be early to the party, as renewable power (solar, wind, hydro, waste-to-energy) takes off amid a renewed focus on energy efficiency and green infrastructure. ESG could be an indicator of income attractiveness and a purely social value.
Citi adds that geopolitics could drive capital towards reconfiguring energy supply chains, as tensions between the G2 powers (US & China) raise concerns over energy security, benefiting suppliers in India, Southeast Asia and Mexico.
Back to Fundamentals
Another consequence of global economic uncertainty is renewed focus on verifiable financial health in target investments.
In addition to steady cash flows and conservative valuations, JP Morgan and Morgan Stanley emphasize the importance of pricing power. In a volatile commercial environment, the ability to defend or even raise prices ensures the resilience of profit margins even during a severe downturn.
HSBC echoes the importance of seeking quality here and now (rather than in the future) by focusing on balance sheets (low debt) and profit margins (the higher the better). Regional advantages should also be considered when assessing the sustainability of these numbers.
UBS concurs with the above, but asserts that a focus on value stocks is particularly appropriate when inflation is high.
If interest rates and inflation begin to decline, investors could consider increasing exposure to growth and/ or cyclical stocks in anticipation of a broader market shift. BlackRock echoes this view, asserting that riskier assets may become attractive again in 2023.
UBS sees the greatest potential for this strategy in European and emerging markets, where equity prices had the greatest devaluations.
Other emerging themes
The above represents the many themes identified by banks in the group, but other themes may rise in prominence as the year progresses, including:
Event-driven strategies (e.g. distressed firms) for specialist managers in public and private markets (Citi)
The continued rise of the US dollar in line with broader market volatility (UBS) with a “deep value bottom” for non-US dollar assets also likely (Citi)
Overweight inflation-linked bonds and real assets (BlackRock)
Longer term positions in innovative segments such as life sciences, medical technology and biotech (Citi)
Views vary widely about the course of equities in the coming year.
Taking a decade-long view, BlackRock is bullish on equities over the long term, but plans a tactical underweight position in the short term as valuations have not yet taken even a mild recession into account.
JP Morgan is more optimistic. It believes that declines in corporate profitability will stop at around 10% (above the historic average) given that companies are generally stable financially and the coming downturn is expected to be moderate. Prices could finish at a higher level than in the past.
While asserting that a slowdown will likely hurt valuations, HSBC is cautiously confident about US equities due to the soundness of the underlying firms compared to Europe.
Sluggish growth will continue to hold back Japanese equities, but opportunities exist in Mainland China, Hong Kong, Southeast Asia (especially Thailand and Indonesia) and Latin America.
Morgan Stanley recommends seeking “compounders,” part of their wider doctrine of targeting companies with pricing power. Similarly, Citi is staking a position in defensive and dividend-paying stocks, with a focus on US dollar assets. But it remains poised to take advantage of opportunities as the situation changes.
UBS observes that stock prices imply 10-year returns of 8% to 10%, compared to 7.4% over the past decade. If we assume a more challenging growth outlook over the coming decade, equities are overvalued.
There is a strong consensus that we are in an age of fixed-income dominance.
BlackRock notes that this is a clear consequence of rising yields, meaning that bonds offer tangible returns.
JP Morgan and Morgan Stanley also expect bonds to perform strongly in the first half of the year, as the Fed continues to raise rates and the economy cools.
HSBC concurs that bonds outclass cash and equities from a risk perspective, and recommends floating-rate securities (e.g. securitized credit) that reprice with unexpected moves in interest rates.
Further below the surface, the bullish tone on bonds becomes more nuanced, as not all opportunities are equally attractive.
Investment Grade vs High-Yield
There is unanimity on the preference for investment grade and a move to neutral or underweight on high-yield bonds.
BlackRock, which is tactically and strategically overweight towards global investment grade credit, qualifies this with a requirement for attractive valuations and income growth. Morgan Stanley also emphasizes the importance of durable free cash flow, most likely to be found in firms with high profitability (e.g. service businesses) and steady recurring income.
The rationale for moving away from lower-quality is the increased risk of recession and a wave of defaults (BlackRock), an insufficient widening of spreads to compensate for this (JP Morgan, UBS), and the diminishing appeal of riskier bonds in a lower inflation environment (Morgan Stanley).
UBS indicates long-term gains are still possible in the high-yield sector. But for now, the emphasis is on quality.
Long vs Short Maturity
The preference for short-term over longer-term maturities is clear (BlackRock, JP Morgan, HSBC, Citi).
HSBC points to the near-term rate environment. Since rate increases are probable, short-term bonds are more likely to price in these effects and are hence less vulnerable.
JP Morgan recommends that investors maintain some exposure to long-dated fixed-income, given that yields will eventually fall as inflation abates, interest rates return to normal and real growth resumes.
Viewpoints differ on emerging market bonds.
BlackRock has lowered its recommendation for emerging market debt to neutral, contending that its run has ended for now.
For HSBC, it is a question of quality. It is bullish on investment-grade US, European, and UK bonds, and also overweight emerging market bonds from high-quality borrowers (preferably US dollar-denominated).
Morgan Stanley maintains that emerging markets debt is still attractive provided that investors can bear the additional risk (noting the domestic currency issue). But if the US dollar weakens, emerging market corporate debt could be a good buy.
U.S. Government Debt
The views on US longer-term government bonds are mixed due to the range of factors involved.
While BlackRock favors short-term government debt and is underweight longer term, Morgan Stanley believes that a re-inverting curve could create attractive potential in US Treasuries, specifying a target yield range of 3.50% - 3.80%.
UBS observes that as inflation declines, real interest rates will rise higher in the next 10 years than in the previous decade and the negative correlation between bonds and equities will be restored. Government bonds may become more attractive as a source of income and diversification as the years progress.
Mortgage-Backed Securities (MBS)
Continuing the theme of selecting quality, Morgan Stanley highlights MBS. By targeting higher-coupon issues, investors can combine the benefits of attractive yields and higher spreads.
BlackRock is similarly positive on MBS, stressing their role in diversifying a portfolio and producing income. Investors should focus on those backed by government agencies as this offers some protection against underlying defaults.
BlackRock acknowledges that private assets are vulnerable to the same headwinds as public markets, and the correction in private asset valuations is merely delayed. Their tactical position is underweight on private growth assets and neutral on private credit.
Strategically, although private markets as an asset class are complex, they are under-represented in the portfolios of qualified investors and should make up a larger portion.
The market situation is attractive for direct lending according to JP Morgan. Particularly, middle market opportunities offer higher underwriting quality and allow lenders to adjust terms if the circumstances worsen.
UBS adds that direct lending is a good fit for endowment portfolios, as it remains an attractive source of diversification and income.
The real estate market presents a mixed picture.
HSBC, Citi, and JPMorgan note that the asset class is a resilient source of cash flow, despite declines in capital appreciation and pressure from rising interest rates.
But the declines in value remain a factor to consider, particularly in commercial real estate.
JP Morgan and Morgan Stanley point out that office vacancy is a longer-term threat as work-from-home becomes semi-permanent in some industries. A recession would also pressure retail sectors (close to an all-time high) if unemployment rises in a future recession.
UBS sees a necessary correction for direct real estate in the coming two years following supernormal returns, and forecasts an annual decline in capital values of 5% to 10%, leaving rental income to provide the bulk of returns.
Private Equity (PE)
Periods of economic uncertainty always offer opportunities for PE investors. But Morgan Stanley stresses that competition for attractive targets and a rising interest rate environment means that general partners (GPs) must be selective pre-deal, and proactive post-deal.
UBS backs this claim, highlighting “value-oriented buyouts” as the deal of choice in a likely emerging trend of firms seeking to go private, trim expenses, divest non-core divisions, and re-focus on sustainable differentiation.
JPMorgan maintains that a passive approach to manager selection is not an option in the coming period, even (and especially) for long-term investors. UBS expects hedge funds to play a significant role as a diversifier in multi-asset portfolios, assisted by higher interest rates and rising returns in traditional asset classes.
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 Euromonitor International - https://www.euromonitor.com/article/global-inflation-tracker-q3-2022-inflation-may-have-peaked-but-energy-prices-continue-to-cause-headwinds
 UBS - https://www.ubs.com/microsites/nobel-perspectives/en/latest-economic-questions/finance-economics/articles/changes-retirement-savings-rules.html
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