Mid-Year 2023 Investment Pulse

Time flies, we are already halfway through 2023. Major investment managers have successively released their investment outlooks over the past month. We have prepared a summary of their perspectives on the growth outlook, inflation expectations, rate policies, equity and fixed income markets outlook, and downside risks. If you want to read a specific outlook, please click on the manager’s name in the write-up. Hopefully, our work can be helpful to you.

Growth Outlook

All investment managers agree on the expectation of a global growth slowdown, however, they express varying opinions on its timing and severity. SSGA and Nuveen are the most optimistic, anticipating a US recession in 2024 rather than in 2023. Wellington Management, on the other hand, takes a more pessimistic view, expecting a substantial weakening of the global economy in the coming quarters. Similarly, Allianz GI that the soft-landing consensus in the US may be broken by the cycle shift in its real estate market. Fidelity International is somewhere in the middle, foreseeing a cyclical recession. JPMAM, PIMCO, and Eastspring remain more ambiguous in their outlook, lacking clarity on both the timing and the intensity of the recession.

The investment managers expressed concerns about various risks to support their recession predictions, including tighter credit conditions, disinflation, fading reopening effects in China, and intensifying fiscal headwinds. They acknowledge the impact of central bank tightening measures, which are expected to weigh on the economy and risk assets.

They express different opinions on China's economic recovery. Most expressed caution or disappointment about the lack of momentum in the rebound, while Wellington Management believes in the solid foundation for sustained growth. Cautious investment managers mention weak business investment, sustainability of demand for service, the lack of clarity of Chinese growth target, and the uncertainty of the US-China relationship.

Split Inflation Expectations

Investment managers hold divergent views on inflation expectations. Fidelity International, SSGA, Wellington Management, Capital Group, Amundi, and Eastspring are optimistic. Fidelity is confident that US inflation will continue to decline given the sharp contraction in the money supply. SSGA believes that as goods supply catches up with demand, price increases will correct. Wellington Management expects disinflation to intensify throughout the year as elevated food and energy prices normalize, although further decline will depend on the strength of demand for service. Amundi sees limited support for inflation in the US and Eurozone as growth slows and labor market pressures moderate. Eastspring notes that inflation will decline in the second half of 2023 due to high base effect while inflationary pressures have been more benign in Asia, helped by slower gains in goods and energy prices.

PIMCO, JPMAM, T. Rowe Price, Allianz GI, and HSBC AM, however, anticipate that inflationary pressures to persist due to supply chain relocation, enduring labor market shifts, and the impact of high energy prices. In particular, JPMAM thinks that, while headline inflation will retreat in the coming months due to favorable base effects, core inflation might not return to 2% as quickly. T. Rowe Price expects U.S. inflation to get stuck at around 3%-4%. They cite persistent demand for services and labor market tightness as factors that will keep upward pressure on costs and prices.

Overall, the lack of consensus on inflation reflects the uncertainty around the path of inflation and the influence of multiple factors, including central bank policy responses, supply chain dynamics, labor market conditions, and consumer behavior.

Rate Cuts Likely Too Late to Prevent Recession

Investment managers generally agree that central banks are near the end of their rate-hiking cycles, but most think that rate cuts will only occur once clear signals of a recession emerge. Allianz GI thinks the market is too optimistic and expects the Fed and ECB to hike rates a few more times by year-end. PIMCO and Nuveen think central banks will prioritize inflation control, Nuveen sees no Fed rate cut until the end of this year. Amundi expects the Fed to push the US economy into recession to bring inflation closer to 2%. Wellington Management has a similar view and warns that the Fed’s policy may be guided by financial markets’ predictions instead of its own.

Equity Underweight to Neutral

All investment managers display caution toward equity markets due to concerns about potential market volatility, tightening credit conditions, and a slowing economy. Therefore, they look to focus on high-quality stocks and diversify their portfolios across regions and sectors.

There's a shared apprehension about investing in US equities. Concerns about year-to-day performance, high valuations, AI hype, uncertainty around the Federal Reserve's future actions, and signs of a weakening economy underpin a broad agreement that the US market carries downside risks. As Fidelity International, JPMAM, SSGA, T. Rowe Price, SSGA, Mackenzie, and Amundi suggest, the US may not be the best bet in the coming months.

Managers see opportunities in other geographies. JPMAM, Nuveen, T. Rowe Price, SSGA, Mackenzie, Eastspring, and Wellington Management find potential in non-US equities, either in Europe, Japan, or emerging markets. These markets display attractive valuations, positive earnings potential, and supportive policies. However, views diverge on which global markets hold the most promise. While T. Rowe Price and Wellington Management are bullish on emerging markets, SSGA and Mackenzie take a more cautious stance, deterred by weak sentiment and geopolitical risk.

China is a topic of contention. Fidelity International, T. Rowe Price, Eastspring, Amundi, and Wellington Management have faith in its potential driven by solid earnings, attractive valuations, favorable policies, and the growth of high-end manufacturing. In contrast, SSGA prefers to remain on the sidelines, wary of uncertainties around growth targets and the strain on US-China relations. European equities also hold a split opinion. SSGA and Wellington Management are optimistic, banking on positive earnings surprises and low valuation, but T. Rowe Price and Mackenzie express caution due to disappointing growth and the possible renewed rise in energy prices.

A noteworthy outlier in the equity outlooks is JPMAM which promotes a potential investment theme: scarcity. They see scarcity in clean energy, materials, food, water, and labor. They expect clean energy and materials scarcity to create opportunities in energy infrastructures, technology, carbon-heavy industries, and renewable energy metals value chain. Water and food scarcity will lead to the growth of sustainable agriculture, water management technologies, reforestation projects, and green infrastructure. Finally, labor scarcity will drive two opportunity streams, one to compensate for the lack of labor (automation and AI), and the other to take care of the aging population (senior care, retirement living, and associated health services).

Corporate Bonds: Avoid High Yield in DMs

Given their cautious stance on equity, most of the managers lean towards fixed income. However, there are differentiated views on asset selection.

Generally, they exercise caution when allocating to developed market credit, and prefer higher-quality bonds. SSGA and Mackenzie favor investment grade over high-yield bonds due to the impact of tightening credit conditions and the possibility of a hard landing. Amundi recommends quality credit and core sovereigns, they don’t think that credit markets have priced in the economic slowdown. They argue that monetary tightening is yet to be reflected in corporate fundamentals due to liquidity accumulated during covid and the low short-term refinancing needs.

Regarding EM bonds, only three managers explicitly have an overweight. T. Rowe Price sees attractive yields and potential peaks in EM central bank tightening. Amundi expects improving corporate fundamentals and a weakening dollar. It is positive on Latin America given that its hiking cycle has ended. Wellington Management, while liking EM local bonds, expects a period of consolidation or more muted performance until the Fed rate-hiking cycle is clearer.

Downside risks

Among the investment managers that referred to downside risks, the majority are concerned about persistent inflation, a potential credit crunch, and geopolitical tensions.

Persistent inflation is a shared concern, with a close eye on labor market dynamics and service demand.

Allianz GI, Nuveen, PIMCO, SSGA, and T. Rowe Price express concerns about higher rates and the aftermath of the US banking crisis, which could lead to a credit crunch. T. Rowe Price estimates that it may take two to three to for the economy to feel the sting. While bank failures attracted headlines, Allianz GI is concerned about the stability of non-banking financial institutions.

Finally, PIMCO and Allianz SE cite potential challenges from unexpected election outcomes in 2024. Allianz SE notes that there are elections upcoming in economies accounting for close to 75% of global GDP in 2024, including in the US, the UK, India, Russia, Taiwan, Indonesia, South Korea, Mexico, Spain, Poland, Romania, Austria, and South Africa.

We hope this overview gave you a brief and informed view of the current investment intentions and can be constructive for your internal and external discussions. Irostors is the first SaaS platform that helps IROs and CFOs to simplify investor targeting through IR data. Feel free to contact us to discuss the solutions we offer.