Vijay Kumar Gaba

Blackrock Investment

Key message

The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market volatility is playing out. A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation. This keeps us tactically underweight developed market (DM) equities. We expect to turn more positive on risk assets at some point in 2023 – but we are not there yet. And when we get there, we don’t see the sustained bull markets of the past. That’s why a new investment playbook is needed.

Themes

1.    Pricing how much of the economic damage is already reflected in market pricing. Equity valuations don’t yet reflect the damage ahead. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes.

2.    Rethinking bonds. We like short term government bonds and mortgage securities. Long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation.

3.    Living with inflation. We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels. We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.

Credit Suisse

Key message and themes

·         Economy: We expect the Eurozone and UK to have slipped into recession, while China is in a growth recession. These economies should bottom out by mid-2023 and begin a weak, tentative recovery – a scenario that rests on the crucial assumption that the USA manages to avoid a recession. Economic growth will generally remain low in 2023 against the backdrop of tight monetary conditions and the ongoing reset of geopolitics.

·         Inflation is peaking in most countries as a result of decisive monetary policy action, and should eventually decline in 2023.

·         Bonds: With inflation likely to normalize in 2023, fixed income assets should become more attractive to hold and offer renewed diversification benefits in portfolios.

·         Equities: Markets are likely to first focus on the “higher rates for longer” theme, which should lead to a muted equity performance. We expect sectors and regions with stable earnings, low leverage and pricing power to fare better in this environment. Once we get closer to a pivot by central banks away from tight monetary policy, we would rotate toward interest-rate-sensitive sectors with a growth tilt.

·         Currencies: The USD looks set to remain supported going into 2023 thanks to a hawkish US Federal Reserve and increased fears of a global recession. It should stabilize eventually and later weaken once US monetary policy becomes less aggressive and growth risks abroad stabilize.

·         Commodities: In early 2023, demand for cyclical commodities may be soft, while elevated pressure in energy markets should help speed up Europe’s energy transition. Pullbacks in carbon prices could offer opportunities in the medium term, and we think the backdrop for gold should improve as policy normalization nears its end.

·         Real Estate: We 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.

Morgan Stanley

Key message

Less growth, inflation, and policy tightening mean the US dollar peaks and high grade bonds and EM outperform. US stocks, HY, and metals lag. It's a good year for 'income' investing.

As growth/inflation slow and central banks pause, assets more sensitive to rate uncertainty will bottom first. EM > DM, bonds > stocks. Volatility lower. DXY peaks.

Themes

·         Europe goes into recession, China waits until spring to end Covid-zero, and the US barely skirts recession as housing activity plummets. The silver lining is that this weakness is short and shallow; global growth bottoms around March/April, and improves thereafter.

·         Both valuations and the cycle support a barbell of high-quality 'income' (high grade bonds, US defensive equities) with 'value' (EM stocks and bonds, EU banks/energy, Japan equities, EM tech/semis).

·         We expect the Fed and ECB to make their final hikes in January and March 2023, respectively, with the Fed cutting by 4Q23. Meanwhile, several large EM central banks, which were well out in front of their DM counterparts, start to ease materially. By end-2023, we forecast that policy rates decline by 275bp in Brazil, 250bp in Hungary, and 475bp in Chile.

·         In Asia/EM, we prefer Korea and Taiwan (for semis and hardware), as well as Japan, Saudi Arabia, and Brazil, and look for quality growth and small/mid-caps to take leadership after some momentum reversal. Stay defensive in the US via healthcare, utilities, and staples.

Fidelity International

Key message

Financial stability joins inflation and recession as a third pillar of risk. Aggressive Fed policy to control high inflation risks a severe recession and/or global financial instability, but overly tentative policy could allow inflation expectations to embed.

We maintain our base case for recession in 2023, first in Europe, then the US. Severity will be influenced by Fed policy, gas flows and fiscal response in Europe, and China’s recovery. We see a cyclical (shallow) recession in the US as most likely.

We believe structurally higher inflation resulting from the energy transition, demographics and reshoring will continue to be a key driving factor throughout 2023, even as supply chains ease.

Themes

Asset Allocation: Defensively positioned: underweight equities and credit, overweight government bonds and overweight cash. Prefer the safer haven of US equities to Europe. Neutral on the UK, Japan, EM.

Equities: Cautious on global equities. We are looking to invest in high quality stocks that are best placed to weather market volatility. Most bullish versus consensus in Asia Pacific ex Japan, particularly the Asean markets and India.

Fixed income: US and core Europe duration are relatively attractive, considering hard landing risks in both regions.

Real estate: We expect this Real Estate cycle to be shorter and shallower than previous cycles, due to greater transparency in the markets, so values will adjust quickly.

ING Bank

Key message

We expect to see several different shades of recession in 2023. We should get a rather textbook-style recession in the US with the central bank hiking rates until the real estate and labour markets start to weaken, inflation comes down, and the Fed can actually cut policy rates again. Expect a recession that feels but doesn’t read like a recession in China with Covid restrictions, a deflating real estate market and weakening global demand, bringing down economic activity to almost unprecedented low levels. And finally, look forward to an end to the typical cycle in the eurozone, where a mild recession will be followed by only very subdued growth, with a risk of a 'double dip', as the region has to shoulder many structural challenges and transitions. These transitions will first weigh on growth before, if successfully mastered, they can increase the bloc’s potential and actually add to growth again.

Themes

Inflation will continue to be one of the key themes of 2023. We expect it to come down quickly in America, given the very special characteristics of the US inflation basket, allowing the Fed to stop rate hikes and eventually even cut before the end of the year. In the eurozone, inflation could turn out to be stickier than the European Central Bank would like and also perhaps afford. Inflation in Asia will peak at the end of 2022, and while we're unlikely to see any significant recovery in the region's economies next year, currencies and risk assets should return to growth.

Commodities: This year has been extraordinary for commodity markets. Supply risks led to increased volatility and elevated prices. However, demand concerns have taken the driving seat as we approach year-end. Next year is set to be another year plagued by uncertainty, with plenty of volatility.

Global trade will continue to slow in 2023 amid economic headwinds. At the same time, trade patterns are changing and supply frictions persist in a volatile and more protectionist world. But transport costs of most overseas trade will be lower.

Business decisions will be shaped by the response to the energy crisis, weakening consumer demand and commitments to reduce carbon emissions in 2023.

Geopolitics continues to be an important driver for financial markets and the global economy. Watch out for Russia-Ukraine war; more territorial claims; and more political unrest.

BNP Paribas Asset Management

Key message

The global economy seems on an inevitable march towards recession. The causes are well-known: central banks aggressively raising policy rates to reduce inflation, an energy shock in Europe, and zero-Covid policies (ZCP) and a shaky property market in China.

Much of Europe is already in recession. We expect one to begin in the US in the third quarter of 2023, and while China’s growth will likely not turn negative, it will be below historic levels.

One can easily think of ways in which the situation could yet worsen: a breakdown in a key financial market due to the rapid rise in interest rates, a cold winter and blackouts in Europe, or a flare-up in geopolitical tensions between the US and China.

J. P. Morgan Asset Management

Key message

As we look to 2023 the most important question is actually quite straightforward: will inflation start to behave as economic activity slows? If so, central banks will stop raising rates, and recessions, where they occur, will likely be modest. If inflation does not start to slow, we are looking at an uglier scenario.

Fortunately, we believe there are already convincing signs that inflationary pressures are moderating and will continue to do so in 2023.

Themes

·         Inflation panic subsides, central banks pause.

·         Recession to be modest.

Robeco Asset Management

Key message

in our base case, 2023 will be a recession year that – once the three peaks (inflation, rates, USD) have been reached – will ultimately contribute to a considerable brightening of the return outlook for major asset classes.

The last leg of a steep climb towards the peak can prove treacherous and markets tend to overshoot here. That implies short-term pain as exhaustion and capitulation take hold, following an already dismal performance across the multi-asset spectrum. While cash levels among retail investors are historically elevated and professional investors are moving towards a consensus of a US recession in 2023, we haven’t seen full capitulation in risky assets yet.

Moreover, as often in deep bear markets, countertrend rallies last longer. This time they’re fueled by the ‘bad news is good news’ mantra that took hold in the era of quantitative easing. We expect the last leg of the bear market cycle to emerge in 2023. This will bring the dislocation in assets that will deliver long-term gain, given the asymmetric risk-reward pay-off that will emerge.

Invesco Asset Management

Key message and themes

2023 will be a year of transition from a contraction regime to one of recovery. We reduce the defensiveness of our Model Asset Allocation, while keeping some powder dry for when recovery is confirmed. We are reducing the government bond allocation to Neutral, while increasing the allocation to high yield (to Overweight). We also reduce the cash allocation to zero, replacing it as diversifier of choice with an Overweight allocation to gold. From a regional perspective EM and US are preferred.

Top ideas Japan equities, EM real estate, US HY, Gold