Investment Outlook 2023 - A fundamental reset
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Investment
Outlook 2023
A fundamental reset
Important information
This report represents the views of Credit Suisse (CS) Investment Solutions & Sustainability and has not
been prepared in accordance with the legal requirements designed to promote the independence of
investment research. It is not a product of the CS Research Department even if it references published
research recommendations. CS has policies in place to manage conflicts of interest including policies
relating to dealing ahead of the dissemination of investment research. These policies do not apply to the
views of Investment Solutions & Sustainability contained in this report. Please find further important
information at the end of this material. Singapore: For accredited investors only. Hong Kong: For
professional investors only. Australia: For wholesale clients only.
Investment Outlook 2023
A fundamental reset
Find out more
4|5 06 Editorial 08 Headlines in 2022 10 Core views 2023 13 Global economy 14 A fundamental reset 20 Regional outlook 22 Investment roadmap 2023 25 Main asset classes 28 Fixed income 32 Equities 40 Technical corner 42 Currencies 45 Real estate 46 Hedge funds 48 Private markets 50 Commodities 52 Diversify your risks 54 The energy system 59 Forecasts 60 2023 in numbers 62 Disclaimer 66 Imprint
Editorial 6|7
A time for prudence Reset is the new reality
Michael Strobaek Nannette Hechler-Fayd’herbe Philipp Lisibach
Global Chief Investment Officer Head of Global Economics & Research Head of Global Investment Strategy
Credit Suisse Credit Suisse Credit Suisse
If 2022 confronted investors with stiff headwinds, All the while, growth has been slowing, with the The “Great Transition” that we foresaw for 2022 has Which leads us to the outlook for 2023: we believe
2023 is likely to be challenging as well. After all, Eurozone and UK even likely to have slipped into played out to a much greater extent than we the global economy has undergone a fundamental
financial conditions are all but certain to remain tight recession. originally envisioned, resulting in a new reality. and lasting reset due to the COVID-19 pandemic,
and the fundamental reset of macroeconomics and shifting demographics, climate change, weakening
geopolitics is continuing. Investors would thus do Looking ahead, we expect financial market volatility Over the past year, geopolitics has made a come- business investment in the wake of geopolitical
well to adhere to a robust investment process and to remain elevated as risks persist and global back as a key driver of the global economy. The ruptures, among other trends. The fallout is evident
diversify investments broadly, particularly as the financial conditions remain tight. This is likely to confrontation between the West and Russia over in our longer-term forecasts for the global economy,
transition out of negative rates is behind us. Our create continued headwinds to growth and, by Ukraine has triggered an energy crisis as well as which we expect will grow at a much slower pace
House View provides a valuable compass in this extension, risk assets. Nevertheless, investors can soaring food prices. than in the 2010–2019 period. Inflation will remain
regard. find opportunities, particularly in fixed income, as we an issue in 2023, though we expect it to eventually
show in this year’s Investment Outlook. Far from normalizing, international commerce has peak and start to decline.
The year 2022 presented investors with a particular- reorganized according to political alliances, marking
ly difficult environment. Inflation was a concern I believe that recent months have clearly reiterated the dawn of a multipolar world. As for financial markets, as inflation peaks and
going into the year, and the onset of the war in the importance of adhering to robust investment monetary policy reaches restrictive territory, fixed
Ukraine drove price levels up further. In response, principles, following a stringent investment process This has resulted in a new economic reality with income should become more attractive again. This
central banks, first and foremost the US Federal aligned with one’s long-term financial objectives and more elevated inflation and a monetary policy regime means that the performance of bonds and equities
Reserve, brought forward rate hikes and have all but seeking broad diversification, including alternative prioritizing inflation stability over growth. As a result, should again diverge, as we expect equity markets
demonstrated their determination to bring inflation investments. Preserving wealth is our singular focus, interest rates are at their highest in years and could still be volatile in the first half of 2023 as
down by tightening monetary policy aggressively. and we remain fully committed to this goal as the economic growth is slowing. slower economic growth hits company earnings.
Indeed, they will not be able to slow the pace of rate fundamental reset continues.
hikes before realized inflation falls persistently. Financial markets could not evade these develop- We hope you find the insights in our Investment
ments, with equities and bonds firmly in negative Outlook 2023 useful, as you navigate and adjust to
territory in 2022. Bonds were unable to act as an this reset.
effective source of diversification within portfolios
(their traditional role), as there was a stronger
correlation between the two asset classes due to the
turbulent macroeconomic environment and tighter
monetary policy regime.
Headlines that moved the markets in 2022 8|9
Tech giant
3 February 2022 4 May 2022 21 July 2022 22 September 2022 23 September 2022 11 October 2022 20 October 2022
Fed launches ECB surprises SNB ends GBP falls on Global growth to The down-
biggest rate hike with hawkish era of mini-budget decline in 2022 turn of the
plunges
since 2000 rate hike
negative JPY
The GBP fell to its lowest Global economic growth is set
level against the USD since to nearly halve in 2022, as
rates
The US Federal Reserve The European Central Bank 1985 after the new UK high inflation, rising interest
on Q4 results
(Fed) raised its benchmark (ECB) surprised the market prime minister unveiled a rates and the Ukraine war The Japanese yen (JPY)
rate by 50 basis points, as it with a larger-than-expected mini-budget that would take a toll. Economic growth experienced its worst ever
seeks to tame soaring rate hike of 50 basis points. The Swiss National Bank significantly increase its worldwide is expected to decline against the USD,
inflation. The rate hike was Considering the elevated (SNB) raised its policy rate to deficit. In response, the GBP decline to 3.2% in 2022 and losing close to 50% of its
the biggest since 2000, and inflation risks, the ECB’s 0.50% at its September fell 3.7% against the USD, 2.7% in 2023, compared value from a high in early
A US technology giant rates, which would weigh on the Fed also announced Governing Council believes “it meeting, delivering the while the yield on 10-year with 6.0% in 2021, according 2012. In the year to date, the
suffered the biggest one-day their future valuations as it plans to begin reducing its is appropriate to take a larger largest policy rate increase UK government bonds to the International Monetary JPY has depreciated by 23%
decline in value for a US will cost more to borrow balance sheet next month. first step on its policy rate since March 2000. The SNB jumped by 33 basis points to Fund (IMF). Global inflation is against the USD due to the
company amid disappointing money to finance their US equity markets responded normalization path than raised its policy rate by 0.75 3.82%. The new mini-bud- forecast to increase to 8.8% Bank of Japan’s ultra-loose
Q4 results. The stock lost businesses. Additionally, the positively after the Fed signaled at its previous percentage points, from get effectively raises the in 2022 from 4.7% in 2021, monetary policy with yield
26%, wiping USD 230 billion surge in demand that many downplayed the likelihood of meeting,” the ECB said in a -0.25% to 0.50%, following UK’s deficit from 6.0% of though it should ease to curve control while the rest of
off its market value and tech companies enjoyed 75 basis point hikes at “the statement. Inflation in the its September meeting. With gross domestic product 6.5% in 2023 and 4.1% in the world – and the USA in
pulling down other technolo- during the COVID-19 next couple of meetings.” Eurozone has skyrocketed far the decision, the SNB puts (GDP) in 2021 to 7.5% of 2024, the IMF says. particular – hikes interest
gy stocks. Tech stocks are lockdowns appears to have The S&P 500 Index climbed above the ECB’s medi- an end to the negative GDP in 2022, up from 3.9% rates substantially, leading to
coming under pressure amid peaked, leading to concerns 3%, while the Nasdaq um-term target of 2%, reach- interest rate policy it imple- in the March budget and the a meaningful rates differential.
expectations that elevated about softer revenues going Composite Index finished the ing a record 8.6% in June mented in January 2015. third-highest level since the
inflation will force central forward. day up 3.2%. due to accelerating prices for Furthermore, it remains 1940s. This will exert 24 October 2022
banks to start raising interest food and energy. willing to intervene in the
foreign exchange market.
pressure on the Bank of
England to hike policy rates New UK
prime minister
24 February 2022 25 April 2022 5 September 2022 13 September 2022 by 75 basis points in Novem-
Brent jumps COVID policies Energy crisis in Inflation ber, given the rise in medi-
um-term underlying inflation-
above USD 100 hurt China equities Europe report puts
ary pressures. Rishi Sunak is set to become and continue to shrink the
the new UK prime minister, risk premium in UK assets,
on Ukraine war
US stocks
China’s main equity indices European natural gas prices 11 October 2022 succeeding Liz Truss, who the government will still need
declined amid concerns about jumped 15%, adding to large
Hong Kong shares hit stepped down after a short to show a fiscally credible
under
Brent crude oil spiked above how the country’s strict increases since the start of and volatile tenure. While his path in the budget to balance
13-year low
USD 100 for the first time zero-COVID policy could the year, after Russia’s major appointment should help in the books.
pressure
since 2014 after Russia impact global supply chains state-owned natural gas rebuilding the UK’s credibility
invaded Ukraine. Assets and the economy. The producer halted gas supplies
US midterm
viewed as safe havens, Shanghai Composite Index to Western Europe, adding to Hong Kong’s benchmark infections have been on the 9 November 2022
including the USD, gold and fell 5.1% on 25 April, while concerns about Europe’s US stocks suffered their equity index hit a 13-year rise recently. The Chinese
the JPY also gained (the Hong Kong’s Hang Seng impending energy crisis and biggest sell-off since June low, as large cities in China government, which is set to
latter two only temporarily), Index slipped 3.7%. China the impact on an already 2020 after a higher-than-ex- once again tightened their hold its 20th National Party
elections
while global equity markets continues to uphold its slowing economy. The move pected US inflation report. COVID-19 restrictions. The Congress later this month, is
declined. Simmering tensions zero-COVID policy as other put pressure on both the Core consumer price index Hang Seng Index fell by keeping its strict COVID-19
between Russia and Ukraine countries slowly begin to GBP and EUR, which (CPI) inflation was 0.6% in 2.29% to 16,801, the lowest policy firmly in place, which is
escalated substantially this ease their restrictions. At the declined against the USD August month-on-month, level since 2009. While the contributing to China’s
year, culminating in Russia’s beginning of April, Shanghai tightened. European coun- clearly above the 0.3% number of COVID-19 cases deteriorating growth outlook.
decision to launch attacks on implemented a strict lock- tries announced special pack- consensus forecast. Along remains low in China, The US midterm elections spending or tax initiatives
several targets in Ukraine. down that remains in place. ages to shield consumers and with better-than-expected US are likely to lead to a divided highly unlikely, we doubt that
The outbreak of war will have Lockdowns over the course industries from rising power employment data, the upside government. Although this it would lead to a govern-
consequences, not only for of the pandemic have disrupt- costs. Nevertheless, sharply inflation surprise makes a 75 would make new fiscal ment shutdown.
Europe’s energy supply and ed global supply chains, higher energy prices and basis point rate hike the base
growth dynamics, but also for leading to shortages for many rising interest rates threaten case for the US Federal
global commodity supply goods and contributing to to cripple the region’s Reserve’s September
chains. rising inflation across the economy. meeting.
world.
Core views 2023 10 | 11
Credit Suisse
House View in short
Economic growth Fixed income Foreign exchange Real estate
We expect the Eurozone and UK to have slipped into With inflation likely to normalize in 2023, fixed The USD looks set to remain supported going into We expect the environment for real estate to
recession, while China is in a growth recession. income assets should become more attractive to hold 2023 thanks to a hawkish US Federal Reserve and become more challenging in 2023, as the asset
These economies should bottom out by mid-2023 and offer renewed diversification benefits in portfoli- increased fears of a global recession. It should class faces headwinds from both higher interest
and begin a weak, tentative recovery – a scenario os. US curve “steepeners,” long-duration US stabilize eventually and later weaken once US rates and weaker economic growth. We favor listed
that rests on the crucial assumption that the USA government bonds (over Eurozone government monetary policy becomes less aggressive and over direct real estate due to more favorable
manages to avoid a recession. Economic growth will bonds), emerging market hard currency debt, growth risks abroad stabilize. JPY weakness should valuation and continue to prefer property sectors
generally remain low in 2023 against the backdrop investment grade credit and crossovers should offer persist in early 2023, but eventually reverse as the with strong secular demand drivers such as logistics
of tight monetary conditions and the ongoing reset interesting opportunities in 2023. Risks for this Bank of Japan alters its yield curve control policy. real estate.
of geopolitics. asset class include a renewed phase of volatility in We expect emerging market currencies to remain
rates due to higher-than-expected inflation. weak in general.
Private markets &
Inflation and central banks hedge funds
Equities Commodities
Inflation is peaking in most countries as a result of
In a more volatile 2023, we see opportunities for
decisive monetary policy action, and should eventu- We see 2023 as a tale of two halves. Markets are Commodity baskets offered protection against
active management to add greater value, particularly
ally decline in 2023. Our key assumption is that it likely to first focus on the “higher rates for longer” inflation and geopolitical risk in 2022. In early 2023,
for secondary managers, private yield alternatives
will remain above central bank targets in 2023 in theme, which should lead to a muted equity perfor- demand for cyclical commodities may be soft, while
and low-beta hedge fund strategies. For seasoned,
most major developed economies, including the mance. We expect sectors and regions with stable elevated pressure in energy markets should help
risk-tolerant investors, we also highlight co-invest-
USA, the UK and the Eurozone. We do not forecast earnings, low leverage and pricing power to fare speed up Europe’s energy transition. Pullbacks in
ments, i.e., direct investments in an unlisted compa-
interest-rate cuts by any of the developed market better in this environment. Once we get closer to a carbon prices could offer opportunities in the
ny together with a private equity fund.
central banks next year. pivot by central banks away from tight monetary medium term, and we think the backdrop for gold
policy, we would rotate toward interest-rate-sensitive should improve as policy normalization nears its end.
sectors with a growth tilt.
Find out more
Global economy
Global economy A fundamental reset 14 | 15
A fundamental reset
Past the peak
Global trade (goods and services) in % of GDP
70%
60%
For many years, geopolitics played a minor role in the global economic and 50%
financial outlook. These were the times of stable international relations and a 40%
relatively high degree of multilateral trust among countries. Though crises
did occur, most of them were for financial reasons. Cracks in that world order 30%
started to appear in 2017, with the first economic tensions emerging be- 20%
tween the USA and China on tariffs and trade under former US President 10%
Donald Trump. Under US President Joe Biden, rivalries evolved to confronta-
tions involving more sectors and regions, which came to a head in 2022 with 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
the war in Ukraine. Last data point 2021 Source Haver Analytics, Credit Suisse
In hindsight, 2022 marks the year when geopolitics After decades of growth in global trade as a share of
took center stage once again, not only significantly global gross domestic product (GDP), the volume of
impacting the global economy and financial markets, goods and services exchanged as a percentage of Out with the old monetary regime This has prompted us to increase our forecasts for
but resetting international relations and commerce GDP peaked in 2008 and has fluctuated in a range 2022 also marked the end of “lowflation,” a side central bank policy rates in all major economies
for many years to come. This has implications for between 50% and 60% ever since. The COVID-19 effect of globalization. Indeed, COVID-related except China. We now expect the fastest pace of
short-, medium- and long-term growth, price pandemic and, more recently, political sanctions, disruptions of global supply chains, more decisive tightening on a 12-month basis and of the largest
prospects and monetary and fiscal policy, potentially have forced companies to prioritize supply chain climate policy action and a full-fledged energy crisis magnitude globally since 1979. Although we expect
leading to sizable shifts in the global monetary resilience over prices since 2020, which has changed and food price shock in the wake of the Ukraine war the pace of tightening to peak by end-2022, we do
system with reverberations in financial markets. trade flows substantially. International trade is now led to a new regime of elevated inflation. Not only not forecast any developed market central bank to
reorganizing in closer alignment with geopolitical did volatile energy and food prices drive up headline cut interest rates in 2023, as they are focused on
New world order alliances, and a shift toward repatriation and domes- inflation, but wage increases also allowed less actual rather than expected inflation.
The world of multilateralism and strong mutual trust tic development has started for strategic sectors. We volatile price categories like travel, hospitality and
between countries and governments came to an believe this trend will continue for at least the next medical services to rise, lifting core inflation to
end – or at the very least paused – in 2022. Deep 2–5 years until potential political change in various multi-decade highs.
and persistent fractures emerged in the geopolitical parts of the world may bring a different political and
world order, giving rise to a multipolar world that we economic agenda in focus again. Central banks saw themselves forced to tighten
believe is likely to last for years. The global West monetary policy in bigger increments and more
(Western developed countries and allies) has drifted swiftly than expected, thus ending the phase of low
away from the global East (China, Russia and allies) or even negative interest rates. Although we believe
in terms of core strategic interests, while the global inflation is peaking in most countries as a result of
South (Brazil, Russia, India and China and most decisive monetary policy action, central banks are
developing countries) is reorganizing to pursue its signaling that they need to hike rates further to
own interests. reduce demand and create slack in labor markets.
One reason for this is that price increases have
broadened from a limited group of supply shocks to
widespread inflation. Crucially, tight labor markets
and higher wage growth risk making broader
inflation persistent.Global economy A fundamental reset 16 | 17
From transitory to entrenched Lower-for-longer era ends
Headline inflation for USA, Japan, Eurozone, Switzerland and UK (% YoY) Selected central bank rates and forecasts
11 7%
6%
10
5%
9 4%
3%
8
2%
7 1%
0%
6
-1%
5 2007 2009 2011 2013 2015 2017 2019 2021 2023
US Federal Reserve European Central Bank Bank of England Swiss National Bank
4
Last data point 01/11/2022 Source Bloomberg, Credit Suisse
3
2
1
0 Growth outlook dims Beyond the 2023 outlook, the transformed geopolit-
More monetary tightening, rising real yields, energy ical environment suggests less international cooper-
price shocks in Europe, China’s ongoing property ation on technological innovation, less free move-
–1 market downturn and COVID-19 lockdowns have ment of human talent and hence smaller productivity
led us to cut our forecasts for GDP growth across gains. As a result, we foresee lower potential growth
the board. We now forecast recessions in the over the next five years.
–2 Eurozone and the UK, and a growth recession in
China. These economies should bottom out by Moreover, the geopolitical events in 2022 have
mid-2023 and begin a weak, tentative recovery – increased the risk that climate action will be uncoor-
–3 a scenario that rests on the crucial assumption that dinated across regions and even possibly postponed.
the USA manages to avoid a recession. Our base In a disorderly climate transition, the negative supply
case is for the US economy to grow 0.5% in Q4 shock will ultimately be larger, leading to higher infla-
2008 2010 2012 2014 2016 2018 2020 2022 2023 compared with the prior-year period, but we tion and lower growth in the medium term, accom-
acknowledge that the risks are skewed to the panied by bouts of volatility as climate policy
USA Japan Eurozone Switzerland UK downside. arbitrarily evolves across regions. This amplifies our
expectations of a new macro regime with elevated
inflation and lower potential growth.
Last data point 15/10/2022 Source Bloomberg, Credit SuisseGlobal economy A fundamental reset 18 | 19
Challenging environment in 2023 in The USD in a divided world In the longer term, however, the resetting of Although we expect this downturn to end and the
developed markets As long as the rhetoric of the US Federal Reserve international relations may lead to new develop- recovery to resume in 2024, we also see lasting
Governments are introducing support measures and (Fed) remains hawkish, the USD should enjoy ments in the global monetary system. Today’s damage to economic structures. The pandemic has
increasing public spending to address current continued support, with USD strength tightening USD-based monetary system, with most global combined with demographic trends to weaken the
politically induced challenges. In many developed monetary policy globally. To prevent currency trade denominated in USD and 90% of all currency outlook for labor supply. Geopolitical ruptures are
countries, budget deficits are already running at 4% depreciation from exacerbating imported inflation, transactions having one USD leg, is still a reflection weighing on trade and leading to persistently weaker
or higher in 2022 and are unlikely to improve materi- the European Central Bank will need to keep pace of the post-World War II era. This system has gone business investment. In China, the policy shift back
ally in 2023. with the Fed even though the Eurozone faces through one big reform (from the gold standard to to a state-driven growth model will likely erode the
recession. Weakness in the JPY looks increasingly flexible exchange rates), involved change in the outlook for productivity growth.
As became apparent in the UK after the new likely to force the Bank of Japan to shift away from monetary policy setting (from targeting money
government announced an expansionary mini- its current easing bias to allow Japanese yields to supply to targeting inflation to quantitative easing) Taken together, we have cut our longer-term growth
budget (which was later scrapped), financial markets rise. Moreover, continued USD strength is likely to and seen reforms in the monetary reserve policies forecasts for all the major economies. For the USA,
are quick to reject unsustainable fiscal policy, pull capital from emerging markets. and tools (from reserves to the introduction of swap we forecast an average real GDP growth rate of
especially when it comes on top of unsustainable lines between key central banks). However, it has 1.5% over a five-year horizon, significantly below the
external balances, i.e., a high current account deficit. With the real trade-weighted USD already at its never been challenged. average growth of 2.2% for the 2010 – 2019 period.
As a result, governments will over time either resort strongest level since 1985, it seems reasonable to For the Eurozone, we forecast an average growth
to tax increases to finance permanent increases in expect the currency to peak and potentially lose The new multipolar world and the resetting of rate of 1.1% and for China growth of 4.4%.
defense expenses and support programs, or risk some ground in the latter part of 2023. Yet this will international trade may well, over time, lead to the
large public debt increases. In highly indebted likely require the Fed to signal an end to its tight emergence of two parallel monetary systems: the On a positive note, the major central banks appear
countries, sovereign bond yields will therefore again ening and some signs of economic recovery outside current USD-based system as well as a yet-to-be committed to returning inflation rates close to their
be at risk of rising sharply. the USA. conceived alternative system bypassing the USD. 2% targets. Inflation may remain above target in
The degree to which this may influence foreign 2023, but should return close to target from 2024.
demand for the USD as a reserve currency and for However, the cost of achieving this will be per-
US government bonds as reserve assets will sistently higher interest rates and lower trend growth.
determine the future of the USD.
Long-term outlook: Lower growth
The energy shock to Europe from Russia’s invasion
of Ukraine and the growth recession in China have
hurt the post-pandemic outlook. The Eurozone is
In the red: Budget deficits across countries likely in recession and the USA, though still growing
Overall government balances in % of GDP slightly in our baseline forecast, is at high risk of
recession.
4
0
–4
–8
India China Japan Brazil Italy France Spain UK USA Germany Russia Switzerland
2022 2023
Last data point 10/2022 Source International Monetary Fund (IMF) forecast as of October 2022Global economy Regional outlook 20 | 21
Regions in focus
USA Latin America UK Switzerland
A close call Tougher times ahead Credibility in question Consumption is holding up
US growth will average close to zero in We now project 2022 regional real GDP growth of 3.0%, up The UK entered a recession in Q3 2022. Despite slower economic growth, we believe
2022, according to our estimates, and from our previous forecast of 2.0%, as we expect stronger We expect the economy to continue to the Swiss economy will avoid recession, as
remain in a slump at 0.5% in Q4 2023 growth in Brazil, Colombia and Mexico. For 2023, our contract through most of H1 2023, with a private consumption should remain solid. The
versus the prior-year period. The probability regional growth forecast is 0.4%, down from 0.7%, driven by peak-to-trough GDP decline of 1.0%. The unemployment rate has declined to the
of recession is high (above 40%), but expectations of weaker growth in several countries, particular- UK’s fiscal stimulus is likely to imply a lowest level in 20 years, and consumers are
recession is still not our base case. Tighter financial conditions ly Brazil and Mexico. Inflationary pressures have been shallower winter recession, but risks to growth are to the still in the mood for spending thanks to the high degree of
are leading to a pullback in cyclical spending, namely goods stronger and more widespread than we initially expected, downside, given the reversal of some fiscal stimulus mea- personal job security. Furthermore, immigration has picked up
consumption and housing, but healthy balance sheets and a making the disinflation process challenging. By year-end sures, spending cuts, tapering of energy support and again and should prove a substantial growth driver in 2023.
resilient labor market should act as a buffer against an 2023, annual consumer price inflation in inflation-targeting tightening of financial conditions. Near-term inflation is likely The surge in energy prices is feeding through to household
outright downturn, in part thanks to a continued recovery in countries in the region will likely remain significantly above to have peaked, but we expect inflation to fall only slowly and expenses only in a limited manner due to price regulation, a
spending on services. Inflation is beginning to moderate, but central banks’ targets. We now see nearly all inflation-target- stay above target in 2023. Fiscal support is keeping upward strong CHF and a relatively low weight of energy in private
core personal consumption expenditures (PCE) inflation, the ing central banks in the region taking their policy rates to pressure on underlying inflation in the medium term. The consumption expenditure. As a result, inflation in Switzerland
Fed’s preferred inflation measure, is likely to remain stubborn- double-digit territory before the end of 2022, with easing combination of the government’s expensive fiscal package is much lower than elsewhere, and we expect it to slow
ly high at around 3% as of year-end 2023. We thus expect cycles unlikely to start until late 2023. and a dovish response from the Bank of England (BoE) further in 2023. Against this backdrop, there is a relatively
the Fed to continue to tighten aggressively. We expect challenged market confidence in UK policy. To some degree, modest need for the Swiss National Bank (SNB) to tighten
another 100 bp of hikes by the end of Q1 2023, up to a confidence has been repaired with the reversal on the monetary policy further. We expect the SNB to raise its policy
terminal rate of 4.75%–5.0%, which we expect to remain
steady for 2023. Gulf Cooperation Council (GCC) extremes of the fiscal package and the announcement of a
fiscally credible plan. Full restoration of credibility likely
rate by another 0.5 percentage points by March 2023 and
subsequently keep it at 1% for the rest of the year.
requires persistent monetary tightening by the BoE. We now
Beneficiaries of geopolitical fractures expect the bank rate to rise to 4.5% by mid-2023. Failure to
Eurozone Japan
In 2022, the GCC economies broadly benefitted from the take it there risks inflation being higher for longer, further
windfall of higher oil prices and a boost to their domestic weakness in the GBP, higher risk premiums and eventually
economies following the pandemic and the transformed higher terminal rates, which could worsen the severity of the
Energy crisis dominates geopolitical environment. We expect the GCC’s GDP growth recession. Above-target inflation in 2023 implies we do not Creeping toward a policy shift
We believe recession in the Eurozone started in Q4 2022 and to moderate to 3.4% in 2023 after 6.1% in 2022 as slowing forecast any rate cuts in 2023 despite a recession. Japan’s economy is likely to see low growth of 0.5% in 2023,
will persist until late Q1 2023, with a peak-to-trough fall in global growth will eventually impact their economies. supported by an easing of COVID-19 restrictions and some
GDP of about 1%. Fiscal policy support, resilient labor Nevertheless, the region looks set to grow more rapidly than strength in the labor market. The jury is still out on how much
China
markets and high savings should mitigate the depth of the the global average, supported by still elevated oil prices. As a JPY weakness will benefit Japanese exports given damage to
downturn, but the risks are to the downside amid persistent result, 2023 should see the fiscal surplus easing modestly to supply networks and downward pressure on the global
uncertainty over gas supply. Headline inflation may be peaking 7.1% of GDP and the current account surplus to 15.0%. A electronics cycle. The key change that we see for the
but is likely to decline only gradually as price pressures have better measure of economic activity is non-oil GDP growth, Modest recovery in 2023 Japanese economy is that inflation is likely to remain above
broadened and wage growth has gained momentum. We which we expect to ease from 4.8% to 4.3% over the same We forecast below consensus growth of 2% through H1 2023. We think this, as well as downward
expect persistently high inflation and currency weakness to period. This underscores the importance of transformation 4.5% for China in 2023, a bounce from pressure on the JPY due to the hawkish Fed, should lead the
push the European Central Bank to hike rates aggressively to plans across the GCC, which are revitalizing the private sector. 3.3% this year. Lower growth potential, Bank of Japan to adjust its policy of yield curve control in early
a terminal rate of 3% by early 2023. In our view, rate cuts are The combination of targeted government subsidies and a firm fiscal consolidation and a slow shift away 2023 to allow for slightly higher yields.
unlikely in 2023. peg to the USD is expected to keep inflation below 3% in 2023. from the government’s zero-COVID policy
should constrain the economy. A likely continued decline in
land sales beyond 2022 will probably prolong the risk of policy
hesitation at the local government level even after the
eventual end of COVID-19 disruptions. The decisive factor will
be how quickly China can move away from these disruptions,
and our expectation is that it will do so gradually. Timing-wise,
we expect China’s mainland reopening to lag that of Hong
Kong by six months. Hence, any meaningful reopening is
expected to happen only toward the end of Q1 2023.Global economy Investment roadmap 2023 22 | 23
Trends to watch
The fixed income renaissance
As bond yields reset at higher levels, inflation peaks,
and central banks stop rate hikes, fixed income
returns look more attractive. Emerging market hard
currency sovereign bonds, US government bonds,
investment grade corporate bonds and selected yield
curve steepening strategies look particularly interesting.
Equity markets remain volatile
An end to rate hikes as inflation peaks Contraction of equity markets’ valuation is well
As inflation peaks and eventually starts to decline, advanced, though challenged corporate profitability
central banks will stop hiking rates in Q1/Q2 2023. from the weak economic backdrop and margin
However, we do not expect rate cuts in 2023 pressure should still lead to headwinds and volatility
because inflation will remain above central bank going into 2023. We prefer defensive sectors,
targets. regions and strategies with stable earnings, low
leverage and pricing power, such as Swiss equities,
healthcare and quality stocks. Defensive Super-
trends such as Silver economy, Infrastructure and
Climate change should also prove less volatile.
Growth set to stay low
Global growth is decelerating, and with monetary
policy reaching restrictive territory, we believe that it
Financial markets
will generally stay weak in 2023.
USD seen staying strong
The USD should be supported by its interest rate
advantage for most of 2023. As a result, we expect
the USD to stay strong, particularly versus emerging
Fiscal challenges ahead market currencies such as the CNY. However, some
Public support measures to combat the cost-of-living developed market currencies such as the JPY are
crisis and increasing defense spending mean budget now undervalued and could stage a turnaround and
deficits will stay high. As borrowing costs remain appreciate at some point.
elevated, governments are likely to increase taxes to
Economics
finance spending.
A good year for most alternative investments
Hedge funds should deliver above-average returns,
Globalization dialed back and 2023 is also likely to be a good vintage year for
As the world becomes more multipolar with the private equity. Secondaries and private debt should
emergence of various political spheres of influence, do well. In real estate, we prefer listed over direct
we expect global trade as a share of GDP to decline solutions.
and strategic sectors to be repatriated.
Multi-asset diversification returns
As bond yields have reset at higher levels, fixed
income as an asset class has gained relative
attractiveness compared to equities. Diversification
benefits should return as central banks stop hiking
rates.Find out more
Main asset classesMain asset classes 26 | 27
Yields make a comeback
The world – and financial markets – have experienced a long list of shocks in Such an environment is conducive to more defensive Investors can build more robust portfolios by
the past few years: global trade tensions; the COVID-19 crisis; massive liquidi- equity strategies, and we favor companies that can
defend profit margins by passing on higher costs and
complementing these more traditional asset classes
with non-traditional ones that offer different features,
ty injections and fiscal transfers to households leading to supersized de- which operate in fields with high barriers to entry – in our view. For example, the current environment of
mand for goods; disrupted manufacturing and supply chains; and the energy characteristics that can be found in defensive quality
segments. Once the interest rate environment starts
slow growth, increasing interest rates and elevated
volatility is advantageous to certain hedge fund
price shock. While the resulting spikes in inflation and interest rates caused to stabilize and uncertainty clears, however, we think strategies, which can thus help to navigate this
havoc in capital markets in 2022, they may well have laid the foundation for a it will be time to shift into quality growth companies
that are currently facing substantial headwinds from
difficult investment backdrop. Similarly, for investors
who can accept limited liquidity in investments,
more normal investment environment going forward. increasing rates. private markets that encompass both private equity
and debt investments should help to enhance return
profiles as the ongoing market disruptions open up
opportunities.
For the past several years, only a narrow set of Our preferred approach to adding bonds to a
asset classes have offered a meaningful positive portfolio will evolve throughout 2023. At the
return contribution to a portfolio, typically associated beginning of the year, adding duration is unlikely to
with greater investment risks. In particular, return be outright attractive for most currencies, with the
expectations from core fixed income had been USD being an exception. Emerging market hard cur-
meager at best amid a lower-for-longer interest rate rency bonds already offer an attractive return outlook
environment. Until recently, the broad consensus as yields have reached levels that are rare in a
was that the world would have to go through a slow historical context and compensate handsomely for
and gradual interest rate normalization, which would the investment risk. Corporate credit from invest-
create a constant headwind for bond returns. ment grade-quality issuers will likely become
Instead, the Band-Aid has been ripped off as interest attractive once central banks signal a slowing of the
rate tightening occurs at the fastest pace in decades, tightening cycle. For high yield corporate credit, we Bonds vs. equities in 2023
and bond yields in different currencies quickly maintain a more cautious view as credit spreads do
normalize and start to offer a more attractive return not properly reflect the challenging economic Higher inflation and rising interest rates should of geopolitical tensions and the looming energy
outlook. environment, in our view. translate into lower prices for equities and bonds. crisis. Additionally, while inflation may eventually
This is because future cash flows are discounted at come off the current highs, the risks are skewed
Bonds are back Headwinds for equities a higher rate. Thus, higher inflation uncertainty toward a protracted tightening cycle, which would
We believe that core bonds will once again play a The environment remains challenging for equity should trigger larger, synchronized swings in the lead to rising real yields. Rising real yields would
more relevant role within portfolios going forward. markets, as we expect the nominal economic growth discount rates of equities and bonds, which would prevent bond prices from rallying at a time when
Yields have now reached levels that offer some rate to slow substantially, thereby reducing revenue result in an upward shift in the bonds-equities equities come under further pressure, limiting their
protection against adverse market effects that will growth potential. Furthermore, close to record-high correlation and reduce the diversification potential of diversification benefits and keeping the bonds-equi-
likely occur as we work through a period of substan- corporate profit margins will likely come under bonds. This is indeed what we have witnessed over ties correlation at elevated levels.
tial economic uncertainty. Furthermore, we assume pressure and start to reflect various cost pressures, the past two years.
that the diversification benefits of adding bonds to a including the energy price shock, higher wages and In our view, 2023 may present a bifurcated picture.
portfolio, which are absent in 2022 as both equities more expensive financing costs. In contrast, growth shocks should primarily affect Initially, the bonds-equities correlation should remain
and bonds have declined, should return, especially equities, via a depressed earnings growth outlook elevated, limiting bonds’ diversification potential.
once growth risks start to dominate the headlines. and lower expected dividends. Bonds, on the However, as inflation uncertainty peaks and the
That said, we acknowledge that we may not have contrary, may benefit from such a scenario as yields focus shifts to growth risks, the bonds-equities
reached the peak in bond yields yet, for example if a fall on the back of lower inflation expectations and correlation should start to drift lower, making bonds
potentially more pronounced reduction of central ultimately looser monetary policy. With growth risks more attractive from both a returns and diversifica-
banks’ balance sheets should occur. This is why abounding at the moment, conventional wisdom tion perspective. The caveat is that this shift in focus
bond market volatility is likely to remain elevated in suggests that we should see a retracement of the may take time, and that extended hawkish central
the near term. bonds-equities correlation. The problem is that bank action may keep the bonds-equities correlation
inflation uncertainty remains a concern for the above the levels seen in the past two decades.
immediate future, particularly against the backdropMain asset classes Fixed income 28 | 29
Worst may be over for
Watch the curves For 2023, we expect the yield curve to steepen, i.e.,
As the Fed hiked interest rates aggressively, bond the spread between 10-year and 2-year yields to
yields rose more for short maturities than for longer increase. The extent of this steepening will depend
fixed income
maturities. For example, the spread between the on the macro circumstances. A scenario in which
10-year and 2-year US Treasury yields declined from the Fed reacts to rising recession risks by cutting
+80 basis points at the start of 2022 to –50 basis interest rates would most likely lead to a significant
points at the end of Q3 2022. Long-term yields are yield curve steepening, as short-term yields would
currently lower than short-term yields because the fall more than long-term yields. But even in our base
market expects economic growth to slow and case of a normalizing economic outlook (i.e., growth
monetary policy rates to fall again over time. remains below trend), some gradual steepening of
the US yield curve can be expected.
With monetary policy tightening likely to slow or end in 2023, we believe
fixed income assets will become more attractive to hold. Particularly,
emerging market hard currency bonds are likely to deliver high returns.
Moreover, if inflation declines as we expect, we think that fixed income,
especially government bonds of countries with fiscal policies that
can be sustained, should offer valuable diversification benefits in portfolios.
Risks to the asset class include a renewed phase of volatility in rates,
for example due to higher-than-expected inflation.
Elevated inflation has prompted central banks higher, weighing on the asset class from a total
around the globe to hike interest rates meaningfully, return perspective. If inflation indeed cools, as we
leading to a sharp tightening of global monetary expect, we believe that government bonds will offer US rates should peak with activity slowing
conditions. Given the shock of high energy prices valuable diversification benefits for multi-asset 10-year US Treasury yields vs. US ISM index
and rapidly rising inflation expectations, central portfolios.
banks were forced to hike interest rates faster and 3.0
more forcefully than in previous tightening cycles. Higher return potential in US Treasuries 25
Bond yields rose significantly in both nominal and Across the major markets, we see the most duration 2.5
real terms, including sovereign bonds in developed potential in USD, and less in EUR. The US Federal 20
2.0
markets. Both US and Bund 10-year yields are up Reserve (Fed) started to hike rates earlier and more
more than 200 bp in the year to date, currently at meaningfully than the European Central Bank (ECB), 15 1.5
3.81% and 2.01%, respectively, as of 10 November. which maintained negative interest rates until July
2022. Not only does the ECB have to catch up now, 10 1.0
Our expectation is that central banks will slow the but the Eurozone is also facing higher inflation and
0.5
pace of rate hikes or end hikes altogether as greater uncertainty regarding energy prices this 5
economic growth deteriorates and inflation cools. As winter. High inflation together with currency weak- 0.0
central bank expectations stop driving yields higher, ness will likely force the ECB to raise rates aggres- 0
the return outlook for sovereign bonds should sively even in a recession. Given the current rate – 0.5
improve significantly. In contrast to 2022, we differentials and the different outlook in terms of –5 –1.0
anticipate that the return outlook for global treasury further rate hikes, we see greater return potential in
indices will be positive in 2023. Opportunities to US Treasuries than in Eurozone government bonds. –10 –1.5
increase duration in bond portfolios are also likely to Heightened concerns about European sovereign
– 2.0
arise once bond yields approach their cycle peaks. debt could make this relative move even more –15
Government bonds have seen their performance pronounced. – 2.5
weaken alongside risk assets, as rising inflation 2008 2010 2012 2014 2016 2018 2020 2022
drove policy rates and the whole yield structure
US Treasuries 10y yield (12-month changes, rhs, %) US ISM (12-month changes, index)
Last data point 31/10/2022 Source Bloomberg, Credit SuisseMain asset classes Fixed income 30 | 31
Investment grade starts to look interesting to refinance in local markets. Against this backdrop, Rising rates make an impact
Despite still robust credit fundamentals, spreads for we favor high-quality segments such as BB rated Yields of EM hard currency and local currency bonds (in %)
global corporate investment grade (IG) bonds are credit, which offers investors a high implied vs.
already close to the average levels of the last realized default premium.
recession in 2020, which should provide some 10
buffer against a further slowdown of growth and Opportunities in emerging markets
withdrawal of central bank liquidity. We expect credit As we enter 2023, the major central banks will likely 9
spreads to stabilize in 2023, as easing inflation and continue to raise policy rates, though at a slower
persistent growth risks are likely to encourage pace. This may keep sovereign EM HC spreads 8
central banks to slow and eventually stop hiking above historical averages for some time. But
rates. This should provide a positive catalyst for IG, negative US Treasury returns and diminishing USD 7
where credit metrics remain solid and we see few strength should result in improved returns for EM
downgrade risks. Emerging market (EM) hard HC. While fundamentals in EM tend to be better 6
currency (HC) corporate debt should benefit once than in developed markets, some EM regions are
global financial conditions stabilize. Moreover, the likely to prove more resilient than others. The risk of 5
asset class offers an attractive spread premium over a slowdown or recession in China and developed
comparable developed market IG corporate credit markets will remain a concern for lower-rated USD Nov 15 Nov 16 Nov 17 Nov 18 Nov 19 Nov 20 Nov 21 Nov 22
with similar duration. After a significant spread issuers in open economies such as South Africa.
widening in 2022, EUR IG spreads are currently Ongoing geopolitical tensions and recession risks in EM HC EM LC
attractively valued. While we do not anticipate EUR IG Western Europe are expected to continue to weigh
to perform strongly in early 2023, the stabilization of on Eastern European issuers. Last data point 10/11/2022 Source Bloomberg, Credit Suisse
global financial conditions might offer a catalyst to
unlock the attractive value EUR IG provides. In a side Despite the challenging environment, we expect EM
scenario, a renewed crisis in Europe – financial or HC bonds to deliver attractive returns. The signifi-
sovereign – would likely force the ECB to activate its cant coupon income they provide should offer a
Transmission Protection Instrument (TPI) and/or restart sound cushion against deteriorating risk sentiment,
quantitative support, which would also support EUR IG with yields near multi-year highs. Valuations remain
spread compression. We therefore believe that we will attractive and fundamentals are holding up better
see an attractive opportunity to enter the EUR IG than in developed markets. Moreover, they already Inflation dynamics still the main risk are also a segment that would not benefit from an
market at some point in 2023. appear to reflect an economic slowdown or reces- Our base case for 2023 is for inflation to eventually eventual intervention by the ECB via the TPI. In our
sionary pressures. On average, EM central banks decline, but stay above the major central banks’ targets. opinion, investors should therefore consider reduc-
HY corporate defaults set to rise modestly are more advanced in their hiking cycle than their Should inflation prove to be stickier and even higher ing exposure to European senior loans and prefer
US HY credit displays solid corporate fundamentals developed market peers, with inflation receding in than anticipated, for example due to surprisingly strong EUR IG credit in 2023.
and a healthy market structure. Indeed, with 51% of several EM countries. Despite some stickiness, we labor market and wage inflation data, we think central
US HY bonds rated BB, little debt maturity that expect inflation to continue to trend lower. As banks would have no choice but to further ratchet up Rising default risk in frontier markets
needs to be renewed in 2023 and a large spread interest rates peak, an increasing number of EM their hawkish rhetoric. This would weigh on fixed The low interest rates of recent years incentivized
compensation, we expect the realized default rate central banks will eventually start cutting rates. Local income performance and temporarily hit longer duration countries to take on more debt. The COVID-19
to increase modestly to the historical average of 5%. currency sovereign bonds offer yields at multi-year indices. We therefore advocate active duration crisis and efforts to provide a buffer against rising
This is below the currently implied default probability highs and are expected to become more attractive management in portfolios in order to remain flexible food and energy prices led some countries to further
of over 6%. In EM, the realized default rate in the later in 2023, when USD strength relative to EM should such risks materialize. In such a scenario, loosen fiscal policy. Despite lending from the
HY segment (equivalent to 43% of the JP Morgan currencies is expected to fade. inflation-linked bonds might outperform within fixed International Monetary Fund, tighter financial
Corporate Emerging Markets Bond Index) reached income. US real yields in particular have become conditions could result in an increasing default rate
a high of over 10% in 2022 due to the war in In Brazil, for example, the central bank is very close more attractive from a long-term perspective. of distressed frontier markets. The most challenging
Ukraine. However, excluding this extreme situation, to the terminal rate already. We therefore favor phase is expected in the latter part of 2023, when
the realized default rate remains low. Like the global Brazil within the asset class as interest rate cuts Challenges for European senior loans central banks could be most restrictive and the
HY benchmark, we expect realized defaults of EM should be possible toward the end of 2023. More- We are cautious on European senior loans. We think economic slowdown or recession is already taking
HC corporate bonds to rise more modestly in 2023, over, Brazil is more resilient in the face of global spreads have not fully priced in the potential defaults its toll, but spillover risk to core EM countries is
given healthier credit fundamentals, a spread macro and geopolitical risks. resulting from Russian gas supply cuts or a per- limited.
premium over developed markets and the possibility sistence of current geopolitical risks. Senior loansMain asset classes Equities 32 | 33
A tale of two halves
2023: A tale of two halves otherwise known as pricing power. In terms of
While we believe that the worst of the de-rating is sectors, we like healthcare due to its defensive
behind us, a significant re-rating of equities would characteristics and margin stability. The relative
require a shift in central bank rhetoric. We expect a valuation compared to other defensive sectors is
turning point in the market to materialize in the also appealing. Furthermore, long-term growth
second half of 2023. Until then, we would expect drivers like better healthcare access in emerging
volatile but rather muted equity returns and would markets (EM), aging populations and new technolo-
focus primarily on defensive sectors/regions offering gies (e.g., mRNA vaccines) remain intact. Our
The higher-rates-for-longer theme triggered a significant de-rating (i.e., lower stable margins, resilient earnings and low leverage. preferred market in this challenging environment is
valuation multiples) of equities in 2022. This theme will likely continue to Once we get closer to such a pivot, we would rotate
toward interest rate sensitive sectors with a growth
Switzerland. Thanks to its defensive characteristics,
it tends to outperform when growth slows. In
dominate during the first half of 2023, leading to muted equity performance. tilt, such as technology. addition, the earnings outlook is relatively bright,
Sectors and regions with stable earnings, low leverage and pricing power How to position for 2023
with double-digit earnings growth expectations for
2023. In EM, we expect Latin America to outper-
should fare better in this environment. In the second half of 2023, we expect Going into 2023, investors should focus on equity form Asia. In equity styles, we currently prefer
that the discussion will turn to peak hawkishness, with earnings resilience in sectors and regions that show resilient earnings
growth and an ability to defend their margins,
quality (i.e., companies with high returns on equity,
stable earnings growth and low financial leverage).
a slowing growth environment in focus. We see the technology sector as
offering the most attractive returns once the US Fed pivots.
The past year has been tough for financial markets, our economists do not forecast rate cuts from major
including equities. The Ukraine war added to central banks, including the US Federal Reserve
post-pandemic supply chain issues and fueled a rise (Fed), in 2023.
in inflation to levels last seen in the 1980s. Central
banks were initially slow to react but were then Earnings resilience key to watch Headwinds from real yields
forced to hike aggressively. Equity valuations came Higher-for-longer policy rates will have a negative The impact of rising real yields on equity valuations
under significant pressure as policy rates and real impact on the global economic outlook. Against this
-1.5
21 21
yields spiked across the globe. In our view, central backdrop, our economists forecast a recession in –1.5%
banks and their policies aimed at reducing inflation the Eurozone, the UK and Canada, alongside very
continue to be a key driver of equity returns. This is
because higher central bank rates increase funding
weak growth in the USA. This will inevitably add
downside risks to corporate earnings, even more so
-1.0
20 20 –1.0%
19 19
costs for corporations and increase the discount rate given rising costs (e.g., wages and raw materials).
of future earnings, which is a headwind to valuations. Consensus earnings have already been revised
-0.5
18 18
materially lower, but the current estimate of 3.7% – 0.5%
Any signs that inflation is brought under control (i.e., growth for 2023 may still be too optimistic, in our
close to central bank targets on a sustainable basis)
would likely loosen central banks’ restrictive stance
view. Ultimately, earnings resilience will depend
heavily on the length and magnitude of the economic
0.0
17 17 0.0%
and could therefore trigger a re-rating in equities
(i.e., higher valuation multiples). However, we do not
slowdown, but we see rising risks of an earnings
recession (i.e., negative earnings growth in 2023). 16
160.5
think this will be the case in the first part of 2023 as
15
15 0.5%
14
1.0
14 1.0%
13
131.5
12
12 1.5%
Jan 18 Jan 19 Jan 20 Jan 21 Jan 22
MSCI AC World 12m fwd P/E US 10-year real yield (inverted, rhs)
Last data point 07/11/2022 Source Refinitiv, Credit SuisseYou can also read
