Below, we review our outlook for 2023, as part of our mid-year update. It has already been an eventful first half of the year, marked by regional bank failures, flare ups in geopolitical risks, ongoing central banks tightening, and recession fears that remain omnipresent. Despite this, we find ourselves leaving our predictions unchanged.
Notably, our two key predictions remain firmly unchanged:
- 2023 will be a year of high forecast risk and prediction error. This is due to the broad range of potential outcomes on inflation, interest rates, macroeconomic cycle, corporate earnings cycle and geopolitics.
- The word “pivot” has already been used aplenty, generating a healthy bull-bear debate. Hopes of a central bank pivot in 2023 now appear to be rapidly waning, and coming towards our prediction of ‘no-pivot’ later into 2024.
Corporate earnings cycle
Recession in earnings growth
Sharp slowdown rather than recession
No central bank pivots this year
Stickier and longer lasting
Our stock level conclusion therefore remains that we want to continue to focus on companies with:
- resilient earnings growth: given risk of ongoing earnings downgrades.
- pricing power: to help protect margins from the stickier inflationary backdrop.
- solid balance sheets: which will provide financial resilience, in case we head into a recession, and;
- structural growth prospects: given the low growth outlook.
The word “pivot” has already been used aplenty, generating a healthy bull-bear debate, although hopes of a central bank pivot in 2023 are now rapidly waning.
Key predictions for our 2023 mid-year outlook update
- Inflation to remain stickier, i.e., higher and longer lasting, leading to central banks unlikely to reach their inflation targets this year.
- However, we expect the pressures driving inflation to start to ease in H2, notably as a result of the favourable base effect.
- All eyes should remain on wage inflation as a key determinant of mid-term inflation.
- Monetary policies likely to continue to hike, although we are now nearing the end of the hiking cycle.
- A central bank pivot is unlikely to happen until sometime in 2024.
- The decoupling of global central bank monetary policies versus the Chinese central bank is likely to be a feature of H2.
- Our central scenario on the macroeconomic cycle remains sharp slowdown rather than recession for both Global and US economies.
- For Europe, our central scenario remains stagflation, this is the combination of inflation and low economic growth.
- We maintain our probability of recession at 30-35%, despite the broad consensus view that there is high likelihood of a recession in 2023.
- China’s economic momentum remains key to the global economic cycle: we expect ongoing recovery in Services in H2.
- The rising risk of a recession, however in the US in 2024 could be an important focal point for investors.
- Following downgrades, the corporate earnings cycle is already in recession, with the risk of more to come in H2.
- Equity valuations are now less supportive, although European and Asia equities remain more attractive.
- Valuation discipline paramount at this stage in the cycle.
- Key market risks continue to center on inflation, interest rates, and geopolitics.
- Volatility, both intra-market and across markets could be high as a result of the elevated uncertainties.
- Investors need to keep focusing on companies with resilient earnings, pricing power, solid balance sheets and structural growth exposures.
- Thematic opportunities continue to abound for long term investors.
- Our key focus themes are Energy Transition, Artificial Intelligence, and Technological & Geopolitical Fragmentation.
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Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
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