After a difficult 2022, investors are watching for the intense geopolitical tensions, the European energy crisis and persistent inflation, according to Amundi, one of Europe’s leading investment managers.
Amundi expects global growth to slow to 2.2% in 2023 – down from 3.4% in 2022 – in several developed and emerging economies, as the economy stagnates.
In Europe, the energy shock created by the war, compounded by inflationary pressures related to the consequences of the Covid crisis, remains the main drag on growth. The ensuing cost of living crisis will drag Europe into recession this winter, followed by a slow recovery. This does not mean that inflation will fall significantly.
In the US, the tightening of the Fed’s monetary policy increased the risk of recession in the second semester, with no certainty of a significant easing of inflation, Amundi officials also said.
This low-growth, high-inflation environment will extend to emerging markets with the exception of China. Amundi cut China’s GDP growth forecast to 4.4%, considerably better than China’s anemic growth of 3.2% in 2022, and is based on hopes of a stabilization of the housing market and a gradual reopening of the economy, post Covid.
Inflation will remain high through most of 2023. Central banks will continue “whatever it takes” policy to avoid a 1970s-style inflationary crisis. Tight monetary policies will continue, but at a slower pace than in 2022. The level of the US Federal Reserve’s terminal interest rate will remain critical, increasing the chances of a US recession if it approaches 6%.
Investment implications
Given the slowdown in global growth and an “earnings recession” in the first half of 2023, investors should remain defensive for now, preferring conservative exposures to gold and investment grade credit.
Adverse conditions should ease in the second half of 2023, favoring an improvement in the business cycle and a gradual addition of more risk assets to portfolios.
Some trends:
- “Bonds are back” with a focus on high-quality credit, while paying attention to currency fluctuations in a world of diverging monetary and fiscal policies, as well as liquidity risks and the effect of public and corporate indebtedness.
- As bonds regain portfolio diversification qualities after rising yields in 2022 and recession risks looming this year, a revival of the 60-40 portfolio allocation is being seen.
- The stock should offer future entry opportunities with a preference for the US and a high quality/value dividend tilt. Investors should gradually increase exposure to cyclical European and Chinese value sectors.
- Persistent inflation prompts a greater allocation to real assets that are resistant to inflation, such as infrastructure. While bonds benefit from more attractive yields, in most sectors and regions, real estate can be a good medium-term diversifier.
- Differences between emerging markets will intensify in 2023. Countries with moderate inflation and better monetary outlooks, such as Latin America and Europe, the Middle East and Africa, are attractive. An eventual Fed pivot should increase the appeal of emerging market stocks later in the year.
- Long-term ESG themes will continue to benefit from the Covid-19 crisis and the war in Ukraine. Investors should be exposed to the energy transition and food security, as well as the restructuring trends of the production and distribution chains caused by the new geopolitical trends. Social themes will again be in focus, as the deteriorating labor market and inflation demand increasing attention to social factors.
“In a scenario of a soft economic landing in the US, we can expect positive returns in 2023 for equity markets, but important risks remain. This evolution cycle of actions is influenced by the correction of Growth type actions, overvalued, an ongoing evolution. From an economic point of view, the risk would be a later and deeper slowdown than widely expected, given a delayed impact of the very rapid rise in interest rates. Moreover, a cyclical rebound in equities has not occurred as long as the Fed has been raising rates,” said Eric Mijot, Global Head of Equity Strategy.
“After an unusually challenging year in 2022, where many asset classes experienced simultaneous negative developments, we believe that 2023 will bring many opportunities across multiple asset classes as the relationship between economic growth and inflation normalizes. We believe that a diversified approach to portfolio construction will once again be beneficial for investors,” added John O’Toole, Global Head of Multi-Asset Solutions.
