Market and Macro Outlook 2023: The Year Ahead

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Market and Macro Outlook 2023: The Year Ahead

MARKET INSIGHTS
17 Gen 2023

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

As the previous year drew to a close, virtually every major financial institution published their macroeconomic outlooks for 2023. Overall, most institutions expressed hopes for a recovery in markets. However, in terms of economics, the picture in Developed Markets (DM) countries – particularly the U.S. and the Eurozone – is particularly fraught. JP Morgan estimates that the personal savings rate among citizens have been largely erased and have fallen to 12-year lows, i.e. the time that led up to the Global Financial Crisis.

One particular sector that has been tanking has been the real estate market. JP Morgan makes an interesting proposition about this sector, which is crucial for determining economic health: given that the supply of housing for sale in the U.S. has seen a massive reduction, this implies that there possibly won’t be any more large-scale declines in housing prices. Over in the Eurozone, the average level of household debt has been low (at least relative to the U.S.), thus making it likely that housing price declines will find a bottom soon.

It’s a rather innovative argument about the mechanics of the market but it doesn’t bode too well for the economic health of the citizenry: if the average American or European isn’t leveraging their personal equity by purchasing property, this implies that there simply isn’t enough money to spend on goods and services.

Inflation has had a large role to play (for several years now) on this cratering of personal wealth in DM economies. Credit Suisse estimates that the countries hit worst by inflation – which is no longer “transitory” but rather entrenched – are the U.S., the U.K. and the Eurozone. For comparison, DM economies Japan and Switzerland have witnessed a more muted trajectory.

Inflation is being expected to continue into 2023. Deutsche Bank estimates that inflation ravaged the U.S. and Eurozone in particular, with Germany taking a bigger hit relative to the rest of Eurozone on average. The bank estimates that inflation might ease off a little bit in the U.S. while continuing to loom relatively larger in the Eurozone. Germany isn’t expected to catch a break in the new year either.

Over in Asia, Japan is expected to improve its handling of inflation while China is expected to continue to maintain the same trends in inflation as it displayed in 2022. There are indications that global manufacturing trends indicate a reduction in consumption in DM economies. Credit Suisse estimates this to have a historically observed correlated impact on the earnings reported by most leading publicly-traded companies.

Now, around Q2, many institutions estimated that over the next 12 months, the U.S. would have a 0% GDP growth, with the Eurozone not faring significantly better. As the year ended, however, many institutions’ GDP growth estimates (for example, that of Morgan Stanley) indicate a modest GDP growth for the U.S. in 2023 while the U.K. and the Eurozone is now being forecasted to continue to contract.

Given that U.S. inflation is neither under control nor significantly curtailed yet, it could be argued that even with a modest increase, this signifies a contraction in real terms.

2022 showed DM economies in the Western Hemisphere taking the brunt of global inflationary trends. Credit Suisse estimated in October that this will continue in 2023 but inflation will rise in leading Emerging Markets (EM) economies such as India and Brazil.

However, since then, both Brazil and India have shown their willingness to combat inflationary trends with aggressive measures so this might be overstated. In fact, India and China are expected to be global leaders in economic growth in 2023 with other EM economies likely to be trending positive as well.

For instance, Morgan Stanley estimates that consensus view indicates that 2023 will be a stellar year for Indian economic growth, with China in 2nd place.

Overall, Credit Suisse also estimated that most equity markets won’t exceed 3% throughout 2023:

while the instruments of best growth will be the likes of high-quality corporate bonds and EM government bonds. The latter is a continuation of the theme that globalization is grinding to a halt while “localization” will begin to reign over the world.

BlackRock estimated that there isn’t nearly enough “damage” in the price to assume a sustained rebound in U.S. equity prices and valuations. In their framework, “damage” signifies loss of conviction and volumes needed to sustain historical valuation trends and trajectories.

A low-intensity conviction persistence in tech stocks during the first three quarters, particularly when options rolled over, provided plenty of fodder for false positive signals in overall trends for 2022. Inflow/outflow trends, however, were aligned with expectations in Q4. Retail investors typically lag in the learning curve relative to institutionals and have consistently cashed out of US and European equity markets over the past year rather than bet on the downside. 2022 was a stellar year for short sellers who cashed in hand over fist while retail investor favorites such as Tesla, Apple, NVIDIA and AMD tanked.

Investors that remain engaged in the market will likely continue to look at buying the dip in “growth” tech stocks, which will likely continue to deflate due to reduced traded volumes and ongoing institutional diversification.

Meanwhile, institutionals will find a target-rich environment in 2023 if the dollar trade gets less crowded: a rationalized dollar won’t induce selloffs by foreign central banks – a massive investor segment in US Treasuries – in order to stabilize their currencies. If the dollar weakens, EM Treasuries will also become very attractive. Added to this is a vast plethora of strong-performing stocks in EM countries and high-quality Investment Grade corporate bonds in the pipeline.

However, If the U.S. Federal Reserve decides to pivot on its aggressive rate cut policies or investment managers don’t continue exploring more sophisticated diversification strategies, the dollar trade will remain crowded which in turn will complicate the economic recovery cycle and exacerbate cost of funding for the U.S. government in its future debt issuances.

For retail investors that don’t simply buy in and wait but instead make tactical plays based on market dynamics, 2023 will be a stalwart year. Exchange-Traded Products (ETPs) provide magnified exposure while potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products that provide magnified exposure on either the upside or the downside of major markets, sectors and investor-favourite stocks here.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Redatto da

Sandeep Rao

17 Gen 2023