Shifting Markets

Shifting Markets

Confidently plan your investment decisions with our in-depth look at the economic forecast for 2023

Download Counterpoint 2023 Market Outlook
Introduction
A year of (almost) two halves

Daniele Antonucci
Chief Economist & Macro Strategist

Financial markets have been dominated by rising interest rates over the past year as the world’s major central banks continued to focus on taming persistently high rates of inflation. Their efforts to apply the economic brakes are working, with the euro area and UK likely beginning 2023 in recession. The US economy is also likely to contract at some point, although less severely. 

This prolonged high inflation was partly driven by disruptions to Russia’s supply of oil and gas to Europe owing to the Ukraine War, which pushed up energy prices. This headwind is likely to continue in the first half of the year. Another drag on the world economy has been China’s zero-Covid policy. A series of prolonged lockdowns affected manufacturers and their suppliers, which has caused the country’s exports to fall. But with China now looking to relax its Covid-restrictions, we could see growth pick up again. 

Markets in transition

We believe conditions will start to improve from spring as the interest rate hiking cycle ends, inflation slows more visibly and China’s reopening progresses. These shifts are likely to trigger a new global economic cycle, with the key regions expanding at their own speeds. 

With markets set to go through this transition over the next year, we believe investment strategy at the start of 2023 is less about whether to increase or decrease risk in portfolios, and more about focusing on positions within key asset classes and regions. Having said that, unexpected events can appear that cause large shifts in investor sentiment (as clearly shown in recent years) so we’ll be monitoring markets for any catalysts that would give reason to change our approach.  

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Following one of the most challenging years in decades, the current cycle is ending and a new one is likely to begin, paving the way to a new investment environment.
WHAT’S INSIDE?
Download our 2023 Market Outlook Report to read our views on:
When inflation will peak

Inflation begins to ease, first in the US and then in the euro area and UK.
However, it is likely to remain above pre-Covid levels.

When central banks will cease rate hikes

The US Federal Reserve announces that it is no longer increasing interest rates,
followed by the European Central Bank and Bank of England.
But we don’t expect rate cuts in 2023.

The impact of China’s economic rebound

The government relaxes its zero-Covid policies
and stimulates the economy with additional measures.
From a low point, growth rebounds moderately.

How our worldview is changing

With inflation declining and central bank interest rates reaching their peak part way through 2023, high quality fixed income becomes attractive. Emerging market equities, helped by a relaxation on Covid restrictions by China, are also strong portfolio diversifiers alongside high-dividend, low volatility US equities.

Key macro & market views

We believe US inflation has peaked, and following a poor performance in 2022, the high-quality US equity market will come to the fore in 2023. US Treasury yields are also attractive given the economic deterioration we expect in the first part of the year.

Our portfolio positioning

We are starting 2023 with a combination of equity and fixed income exposures. These positions reflect our outlook for markets over the next 12 months. However, we are mindful that the investment environment is an evolving one and conditions can soon change. So, we are ready to adjust our positioning if our views on the economy and monetary and fiscal policies change.

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