Key themes for 1Q 2023
The fixed income reset
Bonds had an awful year in 2022 as inflation returned with a vengeance and central banks were forced to slam on the monetary brakes (Guide to the Markets – Europe pg 20, pg 31). Inflation now looks to have peaked in many regions and this should allow the central banks to pause by the spring (pg 7). We therefore believe the fixed income reset is complete. Bonds now offer more income than they have in over a decade and government bonds are once again an effective hedge against recession risk (pg 71).
A bad year for the economy, a better year for stocks
Developed world economies will still be dealing with the after effects of higher interest rates and there is a strong likelihood of recession in 2023. But investors are aware – this is the most well-predicted recession on record (pg 23). So long as the earnings contraction is relatively moderate, we expect investors to look through near-term earnings downgrades (pg 63). Value and income stocks look best positioned (pg 51, pg 49).
Catalysts for a recovery in EM assets
Emerging markets assets – and Chinese stocks in particular – have been depressed by geopolitical risks, regulatory uncertainty, and Covid lockdowns (pg 44). However, we believe these risks are now well discounted, so a resolution in even just some of these concerns could lead to considerable upside from today’s low valuations (pg 62).
Sustainability the key mega-trend
Following Russia’s invasion of Ukraine and spiralling energy prices, European economies have to dramatically shift how they source and use energy (pg 33). This transition is driven just as much by fears around energy security as it is by climate objectives. This will benefit the equity, bond and infrastructure assets that will facilitate the change (pg 85).