Market Outlook 2023 From Top Banks

Looking back at 2022, it has been a year filled with turbulent economical events. Here to shed some light on an otherwise foggy economic future, regarding some hotly discussed topics. Although the overall outlook for 2023 may not seem favourable in every aspects, there are still ways to maintain a green portfolio. As Sun Tze said, In the midst of chaos, there is also opportunity”.  

#1 Global Recession 

With many global central banks restricting monetary policies in 2022, the fear of recession continues to grow into the new year. 

• US Likely to avoid recession. The advance GDP report showed 2.6% (annualized) growth in Q3, nonfarm payrolls grew 261k in October, and there were 225k initial jobless claims in the week of November 5. More fundamentally, there are strong reasons to expect positive growth in coming quarters. – Goldman Sachs
• The probability of recession in the US, UK, and the EU over the next year is already above 50%. – Apollo Global Management

#2 Labour Market Health 

Labour market health varies between each major economy with some still maintaining healthy levels, while others experience increasing unemployment rates.  

• Given that demographics are less favourable in Europe than in the US, labor hoarding could be more accentuated in Europe. That suggests wage growth may also not slow as much.” – ING Economics
• The labor markets remain resilient in the US but labor market rebalancing is likely to be slower in Europe, and risks of a wage-price spiral are higher.”- Morgan Stanley

#3 Global Inflation 

The main headline of high inflation in 2022 carries on into the new year with consumer price index in major economies resting high above the central bank’s expectations.  

• Signs of slowing activity in the west, and a return to full production in China, should ease inflation through the course of 2023, with the shrinking contributions from energy and goods sectors in particular helping price pressures to moderate in the months ahead.” – J.P. Morgan
• Inflation will likely fall slowly, with consumer prices worldwide rising at a 4.6% average next year.” – Barclays

#4 US Interest Rates 

With Fed Chairman Jerome Powell maintaining interest rate hikes at 50 bps, and the soft landing narrative staying true, interest rates hikes in the US may slow down during the first half of 2023.  

• Although we expect the pace of tightening to peak by end-2022, we do not forecast any developed market central bank to cut interest rates in 2023, as they are focused on actual rather than expected inflation.” – Credit Suisse
• Assuming headline inflation and wage inflation are easing, we see US interest rates rising to around 4.5%- 5.0% in the first quarter of 2023 and stopping there.” – J.P. Morgan

#5 Fed Policy 

Expectations of a Fed pivot in monetary policy is delayed into 2023 as inflation figures within the US remain three-times higher than healthy levels.  

• Even as the US Federal Reserve continues to raise rates, valuations should not necessarily decline further. Additionally, growth will again become scarce, likely leading investors to gravitate back towards quality growth.” – BNP Paribas
• A Fed pivot toward interest-rate cuts, which we expect in the second half of 2023 as inflation slows noticeably, will undercut a major support for the dollar.” – Wells Fargo

#6 Emerging Markets Outlook 

With the US dollar potentially rising more in value in 2023, other major and minor economies may find it difficult to pay back debt to the US, possibly forcing some of these nations to conduct quantitative easing.  

• If the dollar does peak against developed market currencies in 2023, as we expect, with the euro and yen finally finding some support, emerging market currencies may also stabilize as the pressure of a globally strong dollar eases.” – Wells Fargo 
• Due to the sharp drop in share prices, equity valuations have fallen across the board. As a result, emerging market equities now look increasingly attractive from a valuation perspective.” – J.P. Morgan

#7 China’s Economy 

As China’s economy attempts to balance a strict zero-Covid policy with the exponentially growing number of internal Covid cases, the re-opening of China’s economy looks to be murky. 

• China’s recent pivot towards gradual relaxation of the Zero COVID policy and more comprehensive policy support for the property sector are notable drivers to support its gradual growth recovery in 2023.” – HSBC
• China looks set to de-emphasize economic growth as it pursues self-sufficiency in energy, food and technology. We see slower growth compounded by the effects of an aging population over time.” – BlackRock Capital  

#8 Europe’s Economy 

With the Eurozone still struggling with high inflation and the ECB aggressively raising rates, the outlook for the Eurozone looks bleak.  

• The Euro area is probably in recession. The reason for this is the much bigger and more drawn-out increase in household energy bills, which should boost headline inflation to peaks of 12% in the Euro area and 11% in the UK, far higher than in the US.” – Goldman Sachs 
• The implication for markets is that the Fed and the European Central Bank (ECB) may not need to do much additional demand destruction” to get inflation down. In that scenario, central banks will not be under so much pressure to keep rates high for an extended period.” – Apollo Global Management Inc

#9 UK’s Economy 

Coupled with political failures and the BoE maintaining a firm hawkish stance, the UK’s economic recovery may take a long time.  

• Elevated mortgage rates and less generous energy support triggers multi-quarter recession. – ING Economics
• We are underweight. We find valuations expensive after the strong relative performance versus other DM markets thanks to energy sector exposure. – BlackRock Capital

#10 Japan’s Economy 

With BoJ Governor Kuroda considering a switch in Japan’s decade long monetary policy, the future path of the Japanese Yen could change abruptly.  

• Japan should benefit from its delayed and still-ongoing Covid-19 recovery as well as accommodative fiscal and monetary policy. Similar in some ways to Germany, the country’s cyclical structure is highly dependent on China, which could provide a tailwind in 2023 and make Japanese equities a useful tool for diversification.” – Deutsche Bank
• As the Fed will likely pivot to a less hawkish stance sometime in 2023, we think this combination would mark an end to the sharp JPY depreciation and a potential significant reversal of our estimated 40% undervaluation in JPY vis à vis the USD.” – Credit Suisse

#11 Housing Market 

The housing market took a hit when the Fed started their aggressive rate hike cycle. As long as the Fed continue to raise rates, the housing market could continue to face downward pressure. 

• The coming year is likely to be a challenging one for real estate but should also create opportunities to lock in higher yields and generate long-term value.” – Fidelity International 
• While goods prices have declined, and the housing market’s sharp downturn should soon be reflected in inflation through lower shelter costs, a strong labor market continues to add to inflationary pressures.” – BNY Mellon

#12 Dollar Outlook 

With rising interest rates, the dollar continues to find support and create new highs. The Fed continuation of rate hikes could have the potential to bring more strength to the dollar.  

• Fed tightening may continue in early 2023, during which time the US dollar may remain supported. But when US economic data turn weaker and the Fed pivots to cutting, the dollar may see substantial downside.” – Citibank
• Cash should be the real winner of 2023, with US front-end yields likely to go to 4.5% or higher and stay there for several quarters.” – Barclays

#13 Stock Market Outlook 

In an environment of weak monetary flow, the equity markets within the US have been on a steady decline. Expectations of further bearish movements may extend into the early quarter of 2023.  

• Our equity allocation favors the U.S. relative to other markets, with a preference for large cap stocks. There has been a regime change within equities, with companies that outperformed in the era of ultra-low rates and ample liquidity expected to underperform in an environment of higher borrowing costs and lingering inflation.” – BNY Mellon 
• Still, US equities remain our main overweight globally as we believe the US may avert outright recession.” – HSBC

#14 Commodity Market Outlook 

Precious metals such as gold and silver may face more downward pressures going into 2023 as demand continues to decline, with safe havens failing to serve as an inflation hedge.  

• Having been the top performing asset class in 2022, Commodities are not expected to do so well over the next ten years.” – Citibank 
• Broad commodities remain a relevant hedge against particularly severe inflationary episodes.” – HSBC