In our 2022 outlook, we wrote “the only certainty is uncertainty,” which was not an inaccurate prediction, but may also be said with confidence much of the time. What 2022 delivered in unexpected abundance was inflation. While it remains elevated, a disinflation story is taking hold and the worst of the impact of higher prints might be behind us. Considering what this means for the near-term cyclical outlook and for longer-term secular trends, we venture to give some more precise predictions for 2023.

The probability of a cyclical recovery from a global state of contraction is increasing. We are more optimistic on the outlook for a few key reasons: first, the sticky part of inflation – wages – is becoming more decidedly unstuck, supporting the disinflation narrative; second, China is re-opening at pace following the government’s volte face on its zero-COVID policy; and third, gas prices in Europe are falling and capacity has risen. These factors are having a positive impact on growth data in Europe and China, as well as on investor sentiment more broadly.

However, we are not yet out of the woods. Growth remains challenged due to the drag of monetary policy normalisation, negative fiscal impulses in certain countries, the ongoing war in Ukraine and weaker business confidence. Meanwhile, questions remain as to where the current downshift in inflation will settle relative to central bank targets and how long hiking cycles will continue. With quantitative tightening likely to continue apace through 2023, liquidity conditions should tighten further.

As a result, the chance of recession remains elevated, with developed markets looking most vulnerable. However, we believe any recession would be mild thanks to central banks’ capacity to ease having greatly expanded, labour markets remaining very healthy in developed countries and the lack of any apparent economic imbalances.

Our global macro cycle indicators

Source: J.P. Morgan Asset Management; data from 11/30/15 through 12/31/22.

Our current macro cycle view by region and component 

Source: J.P. Morgan Asset Management; as at 01/20/23.

Due to the multi-asset, long/short and flexible nature of our investment approach, we are able to reflect the rising probability of recovery while being robust to varying outcomes around our central case. We have increased portfolio beta by raising net equity exposure and adding to more pro-cyclical sectors, while maintaining short-bias and relative value strategies across sovereigns, credit and currencies. Within equity, the secular trends to which we maintain the greatest exposure are cloud computing, digital transformation (software-as-a-service names) and luxury and lifestyle, while we continue to build our exposure to health care innovation and industrial automation. 

We have written in previous years on tech and consumer trends, so we will focus here on the new secular themes to which we are adding. We are seeking to take advantage of opportunities stemming from one of the most significant demographic challenges we face currently: ageing populations. Health care innovation is being driven by the convergence of rising demand for health care services, higher costs for health care providers and recent technological advances. Cardiovascular health, robotic-assisted surgery and biotechnology are areas that we believe stand to benefit from this convergence. As developed nations age, their workforces shrink, presenting a challenge to productivity. At the same time, many of these nations are looking to re-onshore supply chains due largely to geo-political concerns and the experience of the pandemic, thereby increasing the need for workers. Developed nations are not the only countries experiencing a shrinking workforce. As illustrated in the following chart, China’s working-age population is also declining. This dynamic is increasing the focus of governments and companies on making productivity advances through development in industrial automation, providing another area of long-term investment opportunity. 

Shrinking workforce in China propelling demand for robotics 

Source: Shanghai Academy of Social Sciences; as of 1/4/23.

In summary, we expect early 2023 to be characterised by a shift towards cyclical recovery from a state of contraction, where Europe and China are leading the way. There are continued risks to this, and we expect the ride to be bumpy as global growth and liquidity may not have felt the full effects of the monetary tightening done to date. We are monitoring closely for any change in the expected policy paths across key central banks, as well as any change in China’s COVID-19 policy – the key risk being a new virus variant – as well as monitoring Russia-Ukraine relations. We expect markets to be buoyed by recent positive developments and a technical bounce following a period of light positioning, but retain robustness to varying outcomes.

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