What is the outlook for bonds and equities in 2023?

As 2022 draws to a close and we head into 2023, our Elite Rated fund managers and companies share their thoughts on the investment outlook for various equity markets.

The outlook for UK equities

Alex Wright, manager of Fidelity Special Values PLC

“We have seen a lot of economic and geopolitical uncertainty globally in 2022, as economies grapple with levels of inflation not seen for several decades. Most indicators are pointing to a recession, particularly for the consumer as inflation and rising interest rates take their toll. The unpredictable demand picture combined with continued supply chain pressures are also adding to the volatility, and we have started to see that emerge in company earnings. Whilst all this sounds relatively bleak, many of the most affected areas of the market have sold off heavily and some stocks are starting to look interesting.

“After years of being relatively unloved, the UK market started 2022 looking good value, and now looks even cheaper. Current valuation levels and the large divergence in performance between different parts of the market are creating strong opportunities for attractive returns from UK stocks in the next three to five years. In our opinion, the UK market with its higher dividends offers a better prospective return than from many other asset classes, including global equities.”

The outlook for European equities

Mark Nichols, co-manager of Jupiter European

“Investing in Europe looks a pretty scary proposition as things stand. A war on the doorstep, a fundamentally flawed energy infrastructure, record inflation, a stretched consumer and rising interest rates. Luckily for us investing in European equities is not the same as investing in Europe.

“Across the world, stock prices have collapsed, and in Europe it has been more dramatic than in some other regions. European stocks are trading at a significant valuation discount to the US – around 50 percent cheaper on a price-to-earnings basis (a measure of value calculated by dividing a company’s share price by its earnings per share). This discount of European stocks versus the US is the widest in over five years and, in our view, it is extreme. If the market shifts its view from macroeconomic doom and gloom to focusing on how individual companies are doing – we think that quality companies with exposure to long-term growth trends should outperform. These are the types of companies we want to be exposed to for long term returns.”

The outlook for US equities

Bob Kaynor, manager of Schroder US Mid Cap

“Retaining exposure to US equities remains an important allocation in a diversified investment portfolio but there are reasons to reconsider allocations across the asset class. Over much of the last decade, investing exclusively in the S&P 500 would have been the best decision. However, change is now underway. There are now good reasons for investors to broaden their allocations into mid and small cap US companies.

“A good starting point to support US small caps is that today’s valuations are already pricing in a lot of bad news. The universe is not dominated, for example, by secular growth companies like the large-cap S&P 500. This means there is very little valuation premium that needs to unwind to adjust to a changing world economy.

Smaller, more domestically oriented companies in the US are also better positioned to benefit from changing trends in the US economy and there is a major initiative underway to reshore supply chains as globalisation starts to retreat. The US government is also providing major incentives to promote more domestic manufacturing enshrined in legislation through policy such as the Chips and Science Act and Inflation Reduction Act passed in 2022. The Infrastructure Bill of 2021 provides additional tailwinds.”

The outlook for Asian equities

Jason Pidcock, manager of Jupiter Asian Income

“Looking forward to 2023, we expect global inflationary pressures to ease somewhat, though we think inflation is unlikely to fall quickly, and will probably remain elevated compared to pre-Covid levels. We anticipate lower global economic growth in 2023, though we do still expect to see growth in earnings and dividends coming from a number of companies we hold.

“While some market participants are now expecting a rebound in the Chinese economy, we are not as optimistic, instead believing that its economy is on a downwards trajectory over the longer term. As such, we do not have any exposure to China after selling out of our remaining positions in the summer of 2022. In stark contrast, we are particularly positive about the outlook for Australia and expect it to outperform many of its developed market peers over the longer term. Elsewhere, we really like Singapore, which is home to many attractive businesses with revenues from across Southeast Asia. In addition, its flexible immigration policy and stable economy mean we are seeing notable numbers of wealthy Chinese residents deciding to relocate there, a trend we expect to continue, and which should benefit Singapore.”

The outlook for Chinese equities

Dale Nicholls, manager of Fidelity China Special Situations PLC

“2022 has been a tumultuous period for China’s markets with economic growth weighed down by property sector woes and repeated lockdowns as a result of the country’s zero-Covid policy. Market sentiment towards China has been very negative following the recently concluded Party Congress, and we have seen a number of foreign investors reduce their exposure. In our view, this sell-off has been overdone. We believe that government policy will move to address factors related to zero Covid and the property sector, along with further easing for both the monetary and fiscal side. This stands in contrast to the trends we see in many developed markets. Similarly, valuations have moved to significant discounts versus both history and other markets.

“Overall, we remain firm believers in China’s long-term structural growth story and are focused on identifying companies – across both public and private markets – that are best placed to benefit from a growing middle class and the shift towards a more consumption driven economy. While it has been a tough period for investors in China, we remain optimistic about our holdings and confident in the ability of our strong on-the-ground team to help deliver returns over the long term.”

The outlook for fixed income

Richard Hodges, manager of Nomura Global Dynamic Bond

“Instead of focusing on the rather unpredictable short term, we are adopting a longer-term view. We know that the Federal Reserve will soon cease hiking rates – they will go on hold for a while and eventually be forced to cut rates, possibly as early as late 2023 although it could easily be later. Meanwhile, many bond yields now reflect significant value, even if we accept there could be volatility in the short term.

“Areas of the market we believe will offer the possibility for significant capital appreciation (in addition to the substantial yields available) include Bank debt across the capital structure and Emerging Markets sovereigns, where our positions have already recovered to a degree, but which can continue to perform into 2023 and beyond. As we have increased positions in these areas of the markets, we have reduced our US Treasury exposure, but the overall duration of the fund has been maintained close to 6 years.”

Chris Bowie, manager of TwentyFour Corporate Bond

“We are now back to the sorts of yields that we used to have before quantitative easing started in 2008, and that means we’re talking about yields on the corporate bond fund of around 7%. These sorts of yields don’t happen that frequently. So, I think this is a very good buying opportunity, but we have seen a lot of volatility this year. So, capital values have not been immune from this rise in yields.

“I believe the opportunity is best in high quality investment grade credit, because we believe that a recession is coming everywhere next year: in Europe, in the UK, in the US. And the further you go into junior bonds or high yield bonds, the more your capital is at risk. So, I think to be able to withstand the risks of a recession, stay in blue chip, well-known names like Tesco, like BP, for example, and their high-quality bonds.”

The outlook for emerging market debt

Kirstie Spence, portfolio manager at Capital Group

“Emerging market (EM) debt presents a very large opportunity set, and so a selective country by country approach is key as volatility is likely to persist across 2023. There are opportunities both within EM local currency debt and some higher yielding sovereigns along with EM corporate bonds.

“We see value in some distressed credits where much of the risk has already been priced in. We also like some of the higher yielding bonds deemed safer, which have widened alongside the broader sell off, such as the Dominican Republic, Honduras, Senegal and Angola and some high yield EM credits with access to external funding such as Egypt. Furthermore, fundamentals within EM corporates look to be in better shape compared to developed market corporate peers, as EM corporate treasurers have taken a more prudent approach to borrowing. The geographic representation and risk structure of EM corporates is quite different to sovereigns, and so provides an element of diversification. Shorter-dated investment-grade bonds inside the corporate world can offer more defensive positioning. These bonds have proved quite resilient during times of volatility.”

 

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This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.