8 Global Economic Themes Of 2023 And Their Impact On Investors

It's the beginning of 2023 hence the time for outlooks, forecasts or advice for this year.

I will list a few themes that I see as prevalent in 2023 and double down on them with excerpts from outlooks issued by big investment banks or wealth management companies , outlooks that I have read carefully.

The main themes of 2023 are:

1. Global economic development in 2023 that appears to be quasi-synonymous with recession.

So the first theme is recession.

Remember, recession means a minimum of 2 consecutive quarters of GDP decline.

There is a quasi-consensus among major financial groups that much of the world will be in recession sometime in 2023. For example, BlackRock predicts a recession as it expects central banks to excessively tighten monetary policy in an attempt to curb inflation.

The US, Europe and most emerging countries are therefore expected to be in recession, with the exception of China.

UBS sees 41% and 80% probabilities of a recession in the US and Europe, respectively.

So recession is likely in 2023, with no consensus on which quarter it will occur.

2. The second theme is the development of consumer prices, i.e. inflation. Or rather disinflation.

Most analysts believe that we have already seen inflation peak within this cycle, and as central banks continue to raise interest rates, we will see inflation fall in 2023. That is, disinflation.

3. Positioning for recession and inflation

The third theme is where the strategies for positioning against the recession-inflation combination come into play.

As written in one of my previous articles, the approach should be cautious, "defensive" in investment terminology.

In their forecasts, some financial groups even express such an approach as follows: "Approach 2023 with caution!".

I would translate this into the following: diversified strategy across several asset classes, notably government bonds (which are starting to become attractive in terms of yields), defensive equities (I will list them below), but also commodities - fuelled by China’s reopening, if it proves successful.

Asset classes such as real estate are likely to encounter head winds?in 2023.

Credit Suisse analysts, for example, expect the environment for real estate to become more challenging in 2023, as the asset class faces headwinds from both higher interest rates and weaker economic growth.

4. The theme of bonds

Most financial group analysts see this asset class making a strong comeback in 2023, if, and I repeat, if central banks bring inflation to an acceptable level and resume monetary easing, i.e. pivot to lower interest rates.

For example, Goldman Sachs believes that new and less risky alternatives in fixed income instruments are emerging this year: US corporate bonds that are expected to average a yield of close to 6%, are low risk and relatively insulated against an economic downturn. Investors can also lock in attractive (inflation-adjusted) real yields with 10- and 30-year inflation-protected US Treasuries (TIPS), with yields close to 1.5%.

5. The theme of equities

On this team there are differences of opinion among analysts, particularly on the geography of where preferred stocks should come from.

There are groups of analysts who consider equities in developed markets (En. Developed Markets) expensive and recommend a focus on emerging markets.

Emerging markets, as a reminder, are economies that possess some of the qualities of developed countries and are in transition from a low-income economy to a modern, industrial economy with a higher standard of living. Current examples of emerging market economies include India, Mexico, Pakistan, Saudi Arabia, China and Brazil.

Morgan Stanley expects equities to head for a volatile period next year, estimating that the S&P 500 will end next year about where it started, around 3,900.

BNY Mellon Investment Management, on the other hand, regionally, prefers U.S. equities to equities in other developed countries and emerging markets, primarily because of the higher probability (though still low) of a soft landing in terms of monetary policy, which would boost U.S. equities in particular.

UBS expects that weak growth and earnings would drag the market lower to a bottom of 3,200 in the second quarter and then a rebound to 3,900 by the end of 2023. With revenues and margins under even greater pressure in Europe, Eurostoxx is likely to do worse, bottoming in the second quarter at 330 and ending 2023 at 385. Quality and Growth stocks are likely to perform better than Value, in their view.

Certainly, in terms of stock categories, defensive shares prevail in analysts' forecasts, at least while we are operating in the recession - inflation mix.

Defensive stocks are those stocks that are resilient in an unfavourable economic context: food, utilities, healthcare.

Below are some types of defensive areas.

- Utilities

Water, gas and electricity utilities are examples of defensive stocks, because people need them in all phases of the economic cycle.

- Consumer staples

Companies that produce or distribute basic consumer goods, goods that people tend to buy out of necessity regardless of economic conditions, are generally considered to be defensive. These include food, beverages, hygiene products, tobacco and certain household items.

- Healthcare

Stocks of large pharmaceutical companies and medical device manufacturers fall into this category.?

6. The theme of commodities

There are analysts who link China's reopening to increased demand for commodities, especially those related to energy (oil, gas etc.).

Groups such as Northern Trust, UBS or Wells Fargo expect part of commodities to perform well in 2023.

Amundi Asset Management, for example, is confident in the evolution of gold.

7. China?

China is a theme by itself given the post Covid economic reopening stance.

Schroeder, for example, believes that, fuelled by liquidity and economic growth, Hong Kong and mainland Chinese equities are likely to outperform other markets, particularly emerging markets.

8. The US dollar

Brandywine Global Investment Management believes that the strong strengthening of the dollar in 2022 has been driven by an alignment of factors that will not persist into 2023. The dollar is overvalued in their view, and the relative growth outlook for other hard currencies points to a weaker dollar next year. This is because monetary policy is expected to tighten further outside the US, particularly in Europe. A weaker dollar will also, in Brandywine's view, allow for some stability in emerging market currencies, which they say are generally undervalued.

Conversely, if the Fed tightens policy more than the ECB or BOE, the dollar will remain strong against the euro or sterling.

Disclaimer: opinions are the author’s or quoted and do not represent investment / divestment?advice nor advertising for a particular financial product, financial service or financial company. Returns and performance mentioned are not a guarantee for the future.