Mid-Year Outlook 2023: Key Convictions for H2 2023
Friday 23 June 2023
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A summary of the key points in the mid-year outlook 2023:
- Key CIO Convictions for H2 2023
- Infographic - Investment themes for H2 2023
- Uncertain growth path calls for allocation to remain defensive
- Dynamic asset allocation calls for a cautious start before adding equity
- Scenarios and Risks
Key CIO convictions for H2 2023
1. Narrow and uncertain path to growth, with a bottom in H2 2023
The lagging effects of tightening in the real economy will lead to a further deceleration in growth with divergences: a mild US recession, anaemic growth in Europe and more resilience in emerging markets. With low absolute numbers, both on the positive (Europe) and negative (United States) sides, the path ahead remains very uncertain.
2. Gradual slowdown in inflation
Inflation is trending lower, but the speed of adjustment is slow as core inflation remains sticky and stubborn. Evidence from past episodes of high US inflation suggests it will take about two years to bring core inflation down by half from its peak level. This is also our view this time.
3. Monetary tightening is close to peaking, but do not expect a U-turn
We believe that Fed and ECB rates are close to their cyclical peak and do not expect any cuts for the remainder of 2023, as inflation remains above central banks’ targets and the slowdown is pushed back towards year-end.
4. The growth premium of emerging markets remains wide, with Asia in focus
The resilience in emerging market (EM) growth is leading to a wide growth gap vs. developed markets (DM). We expect Asia to continue to attract investment flows and also to benefit from China and India moving towards more sustainable and inclusive long-term growth models.
5. US consumer resilience is a key variable to watch
So far, strong demand has allowed companies to pass through higher costs to consumers, but these benign conditions should fade. Savings will dry up and tighter lending conditions are worsening the outlook for consumers. We expect a deterioration in US sales and EPS.
6. The cyclical outlook calls for a cautious start to H2
The uncertain macroeconomic outlook and weak corporate earnings growth call for allocations to remain cautious as upside is uncertain and downside risks persist, while risky assets valuations are expensive. The summer earnings season could shine some light on the resilience of companies. A Fed pause, moderating inflation and a persistent recovery in earnings should spark the move into a late-cycle phase and be more favourable for equity markets towards the year-end.
7. Rates close to peak support bonds, govies and high-quality credit
Bonds are back is the key 2023 investment theme. Moderating inflation, growth slowing down and a Fed pause will support global high-quality credit, while inflation protection also remains in focus. Investors should stay cautious on high yield, and be mindful of liquidity risk and corporate leverage.
8. Equity: focus on quality, look beyond mega caps and seek to add to cyclical markets
Concentration risk is high, as US equity market upside has been driven by just a few names. Opportunities are now in the quality space in the search for earnings resilience and in moving down the capitalisation spectrum to avoid areas of excessive valuation. Later in the year, the move towards a late cycle could favour cyclical markets, such as Europe.
9. Play emerging markets’ growth advantage in equity and bonds
Attractive valuations, an end to Fed tightening and a possible US dollar depreciation bode well for EM assets. Selection remains crucial, as there are areas of fragile economic conditions and the inflation-monetary policy outlook is mixed.
10. Asset allocation resilient to inflation in the spotlight
Inflation remains above normal levels and calls for additional sources of diversification such as private markets (particularly infrastructure) and hedge funds (global macro). Addressing the direction of inflation will be key to tilting sector allocation towards areas more resilient to inflation.
Mid-Year Outlook 2023: Key Convictions for H2 2023
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