The global economic and investment outlook for 2023

As we head into a new year, our Elite Rated multi-asset fund managers and market strategists share their thoughts on the investment outlook for 2023.

Anthony Willis, investment manager in the Multi-Manager team at Columbia Threadneedle Investments

“We see plenty of uncertainty ahead in 2023, not least over the recession across the UK, Europe and the US. Economies have already slowed, and indeed the UK and Europe are likely already in recession. With the US less impacted by the energy concerns across Europe the recession in the US may well be shorter and shallower.

“As always, the actions of the central banks, and how far they go to counter inflation, will have a significant impact on the economic and financial market outlook. Inflation looks to be with us for some time yet and will likely end 2023 still above central bank targets. Geopolitical risks will also weigh on financial markets, with the war in Ukraine continuing and Russia likely to use energy disruption to test western resolve in supporting Ukraine.

“The list of worries is long and while the pullback in markets in 2022 suggests some of the bad news has been digested already, we remain cautious in our positioning and are underweight equities. However, there are opportunities in bonds, an asset class that seems to have priced in more of the risks around recession in 2023 and offers a more attractive risk/reward than we have seen for many years.

“Equities appear not to have fully priced the slowdown in earnings that we would associate with a recession. A longer-term change is financial markets moving away from the low rates, low inflation backdrop that has been so supportive of returns in the last decade. Money is no longer ‘free’ – interest rates are normalising amid higher inflation, and this changes the backdrop for households, consumers and governments.

“In this environment, returns look harder to come by, but there will be more opportunities for stock-picking fund managers and active fund management in the absence of the ‘rising tide’ that seemed to float all boats in the low interest rate years, which for now, are behind us.”

Hugh Gimber, Global Market Strategist at JP Morgan Asset Management

“2023 looks set to be a bad year for the economy but should be a better year for the markets. The key question is actually quite straightforward: will inflation start to behave as economic activity slows? If so, the central banks will stop raising rates, and recessions, where they occur, will likely be mild. Fortunately, we believe there are already convincing signs that inflation is moderating and will continue to do so next year.

“Both stocks and bonds look to have pre-empted many of the macro troubles set to unfold in 2023. We are more excited about bonds than we have been in over a decade. In equity markets, the broad-based sell-off has left some stocks with strong earnings potential trading at very low valuations; opportunities in climate-related stocks and the emerging markets look especially compelling.

“The risk scenario for next year is a repeat of 2022: stubbornly high inflation that forces the central banks to keep hiking further than the market anticipates, putting pressure on equities and bonds simultaneously.”

Markets often move ahead of earnings forecasts

^{Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Earnings are 12-month forward earnings expectations. Past performance is not a reliable indicator of current and future results. Data as of 28 November 2022.}

James Mahon, co-manager of SVS Church House Tenax Absolute Return Strategies

“After the unpleasant experience of capital markets in 2022, predictions for 2023 are somewhat tarnished. I will split into three Bs: The Base case, the Buts and the Buys.”

The Base Case …

“The Federal Reserve, along with the Bank of England and the European Central Bank, are close to the end of their rate tightening cycle, we will see peak base rates in the first quarter. Inflation will ease through 2023 while the US, Europe and the UK will see recessions, albeit mild. This should lead to a more benign backdrop for markets.”

… The Buts …

“Central banks will move cautiously, may hold rates too high for too long and the rate of decline in inflation may disappoint. Meanwhile, the central banks should be easing the rate tightening but will be keen to carry on reducing their bloated balance sheets (quantitative tightening).

China re-opening is viewed positively, but its economy is weakening otherwise, and this is likely to disappoint. Who knows what the ghastly Putin might do next.”

… The Buys

“My first pick is UK short-dated credit. Credit spreads are still high making the returns on offer in sterling corporate fixed interest (investment grade) very attractive. Longer dates just don’t offer enough compensation for the extra risk. I also like UK smaller companies. Equity markets should look up in 2023 but UK medium and smaller companies are still looking beaten-up and offer a high beta play on a recovery (but please stick to quality companies with sound balance sheets and decent margins…).”