First and foremost, we would like to thank you for your active followership and the exchanges we had over the past six months.
For the last blog of 2022, we went through the 2023 outlook published so far by major investment managers and the most recent asset owners' survey led by Natixis Investment Managers to give you a crisp summary of institutional investors' views on crucial topics for the coming year.
Anemic growth in DM, likely rebound in EM
Most investment managers and asset owners think a recession is likely. The general view is that the US will go through a mild recession. Investment managers are generally conservative about US GDP growth, and the forecast is in the -2% to 0.5% range vs. 0.9% for the consensus forecast. On the other hand, most managers expect a deep recession in the UK and Europe. But what worries asset owners more is the likelihood of stagflation. For China, the majority expects an exit from covid restrictions in 2023, with GDP growth rebounding to 4.5-5%. However, many do not see the growth materialize before 2Q or 2H23.
Inflation to decline, but uncertain how high it will stay
The consensus view is that inflation will moderate and avoid a 1970s-style crisis. The question, though, is by how much. Both asset owners and investment managers think inflation will stay above the 2% target level until the end of 2023. For example, JP Morgan AM forecasts US inflation to be 3.5% by 4Q23. While BlackRock and Fidelity do not aim at a level, they highlight that structural drivers such as declining demographics, reshaping of the supply chain, and energy transition may keep inflation above central banks' target for longer.
Central Banks to pause, but unclear on when pivot may happen
While the current Fed funds rate target range is 3.75-4%, the market expects it to peak at 4.5%. Investment managers are, in general, more hawkish. Schroders and JP Morgan AM expect the rate to peak between 4.5 and 5%, while Allianz GI aims at above 5%. When it comes to Fed's pivot, very few provided a timing. We only saw AXA IM and ROBECO forecasting the first rate cut in 2H23, which is later than the market anticipates. We note, however, that Goldman Sachs is surprisingly hawkish, as it expects no rate cut in 2023, mainly on the back of the strength of the US labor market. In line with their forecasts on inflation, BlackRock and Fidelity believe that interest rates will settle higher than where they used to be. Also, worth highlighting that in line with their rates expectations, most investment managers expect USD to weaken in 2023.
Regime change or no regime change
Extending macro views beyond next year, it is worth noting that BlackRock and Wellington Management stress that the recurrence of economic cycles will be more frequent. In response, more granular asset allocation will be needed. Re-globalization and energy transition will likely impact the global economy more than the market expects. Other investment managers also concur with this possibility by referring to higher inflation/interest rates (Janus Henderson, T. Rowe Price) or the return of volatility. Overall, asset selection and fundamental research will be back at the center stage in the way managers evaluate investment opportunities.
Investment grade credit is the favorite trade, wait-and-see for High Yield and Equity
Investment Grade credit in developed markets is a top pick for most managers. The absolute yield level is attractive, and IG corporates are in good shape to withstand the recession. After all, a wave of fallen angels materialized during Covid.
For High Yield and Equity, it is mainly subject to timing. No one denies there are opportunities to build solid returns during this downcycle. However, most managers consider the current credit spread for High Yield still tight compared to the historical average (although T. Rowe Price begs to differ). Similarly, major managers (BlackRock, Vanguard, Fidelity, Amundi, Allianz GI, Schroders, T. Rowe Price) remain convinced that equity valuation is still too high. For example, Fidelity sees earning downgrades in 1H23 and equity trough to follow. Recurring themes in the outlooks are:
Many managers (Allianz GI, Fidelity, Invesco, Schroders, Aviva Investors) underline that Chinese equity is attractive. Fidelity is positive on Chinese consumer staples, financials, and healthcare, while Aviva Investors likes financials, consumer electronics, and EV. Schroders focuses on themes driven by political priorities such as supply chain localization and industrial automation, renewable energy, construction machinery, and healthcare. Yet, some are bearish on RMB in the context of supply chain remapping.
Top economic risks for 2023
• War, as an escalation in Ukraine and other potential conflicts, could push inflation up again
• Central Bank policy error. Either over or under-tightening will respectively lead to deeper than expected recession or upsurge in inflation
• US/China relations. Tensions over Taiwan, China's support to Russia, attempts to establish an alternative trade currency, and the list continues.
• Global trade, to a large extent, relates to US/China tensions through trade sanctions
• Consumer spending. While households in developed markets enter this recession with above-average saving buffers, leading indicators such as consumer confidence have tanked
• Food/resource crisis
• Climate risk
Top sector picks
• Energy, driven by the supply issues created by Russia and the accelerated transition to renewables
• Healthcare for its defensiveness and more reasonable valuation
• Financials, driven by the increase in rates and the healthier leverage
Top sector pans
• Real Estate, due to the decline in residential property value and extension of work-from-home and hybrid work policies
• Consumer discretionary, driven by a contraction in consumer spending as the labor market cools in the US and energy prices squeeze household budgets in Europe
• Materials as the real Estate and consumer discretionary sectors slow, and the Capex cycle resets.
We hope this article helps fuel your discussions with your management and prepare for investor meetings. We wish you a fantastic year-end holiday!
As usual, you can reach out to many of the analysts and portfolio managers of the investment managers referenced in this article through Irostors. If you are interested, feel free to get in touch with us.
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Allianz GI Amundi Wellington Management BNPP AM BlackRock Vanguard Natixis Investment Managers JP Morgan AM Fidelity Schroders AXA Investment Managers ROBECO Invesco Goldman Sachs Janus Henderson T. Rowe Price Aviva Investors
Energy Healthcare Financials Consumer Discretionary Real Estate Materials