Horizon Q1│2023 - Multi-asset strategy

Review – bottoming out in the second half of 2022

The fourth quarter brought what the markets had been waiting for for a long time: lower-than-expected inflation in the US. This fuelled hopes that the inflation peak there had already been passed and that the central banks would no longer have to put the brakes on so hard. The US Fed fuelled this hope by discussing a reduced pace of further interest rate steps. With regard to China, the mood alternated between hopes of an opening and new fears of a slowdown. Global equity markets recovered significantly from the lows at the end of September/beginning of October – especially European equities. From mid-October, with somewhat weaker economic data, bond yields also fell from their highs. The environment of positive correlation between equities and bonds thus remained intact. The overvalued US dollar weakened significantly. The upward trend here seems to have been broken. Gold traded almost unchanged in euro terms in the fourth quarter and oil fell, while industrial metals increased significantly.

Economic outlook - change of focus from inflation to growth

Overcoming the inflation summit, an end to interest rate hikes and likely even interest rate cuts in the US in the second half of 2023, a significant recovery of the eurozone economy from recession from spring onwards, only a mild recession in the US, the easing of COVID-19 restrictions in China and possibly also an easing of the situation in Ukraine in the course of the year – the economic environment forecast by our economists does not seem so bad for the financial markets in 2023.

However, the economy is likely to weaken initially before things improve again, and the focus of the markets is likely to switch from inflation to growth. Equities and government bonds could thus temporarily move in opposite directions again and a diversification effect could return. Nevertheless, risks lurk in the growth of the economy as well as in the expected earnings for 2023. We consider profit expectations too optimistic – with increasing pressure on margins, profits are unlikely to rise. And the risks remain manifold, from new geopolitical conflicts to credit events in the face of higher financing costs and weaker growth, to inflation that is too stubborn and/or a much harder landing for the economy after all. Moreover, even after the end of the interest rate hikes, there is still the threat of burdens from the withdrawal of liquidity through quantitative tightening in the US and the eurozone. 2023 is thus likely to be a better year on the financial markets, but not an easy one, and also a very path-dependent one. For example, the answer to the question “Which comes first, the Fed pivot or China’s complete opening up from COVID-19 restrictions?” could make a significant difference to markets. But even if the acute problems are overcome, an environment comparable to that of the past decades is by no means to be expected thereafter. There were already increasing signs of this in 2022.

Turn of the times and reorganisation - many things are different in the medium term

Disinflation and deflation fears gave way to high inflation, to levels not seen for more than 40 years. The primary goal of central banks is no longer to support the economy and financial markets but to fight inflation, even if this brings dangers for the economy and markets. The example of the UK has shown that financial markets are critical of massive increases in government debt. The unipolar, US-focused world order is changing with deglobalisation, Russia's war of aggression on Ukraine and the decision of the G7 and the EU to freeze the currency reserves of the Russian central bank into a multipolar world order in which many countries do not want to be closely tied to only one major partner. The development of new supply chains, the infrastructure for mobility and energy supply, and the energy turnaround require strong investments and necessitate a race for scarce raw materials. This distinguishes the current situation from comparable situations in the past, where excesses in the real economy had to be compensated for in a recession. In contrast, we recently experienced an exogenous shock and we have to invest to leave the shock behind. This offers opportunities. However, deglobalisation, the energy transition and the persistent supply bottlenecks in raw materials and labour (demographics) in the medium term are likely to ensure that inflation picks up again quickly with a recovery in growth, which should then again quickly call the central banks into action. The results are shorter, stronger and more erratic inflation and economic cycles and thus increased planning uncertainty. This weighs on valuations, as investors justifiably demand a higher risk premium. Investors should therefore not hope for a rapid, sustained expansion in equity valuations. Even if we see recovery potential for equities in 2023, given low investor positioning and widespread pessimism, the potential remains limited.

Alternatives in bonds, commodities and emerging markets

For the first time in 14 years, the yields of high-quality corporate bonds clearly exceed the dividend yields of equities (lower figure). Many bond segments, such as subordinated bonds, already offer such a high current yield that they are expected to deliver a positive return in 2023 even if interest rates/spreads rise slightly. Moreover, unlike many government bonds, yields on corporate and emerging market bonds should more than compensate for higher inflation on average in the medium term. Commodities, especially industrial metals, remain clear beneficiaries of the changed environment, and emerging markets such as India, Indonesia and Latin America should also benefit.