Welcome to our special January edition of the Edison Insight which strays from our usual format as it does not include any company profiles. Instead, we look at the outlook for 2023.
Alastair George believes that global markets may surprise to the upside in 2023. After a historically challenging 2022, the painful post COVID-19 ‘normalisation’ trade may be near its climax. Long- and short-term interest rates are now where they need to be to lower demand, leaving in prospect a period of disinflation as supply chain constraints ease. Furthermore, global equity valuations have reverted to levels in line with long-term averages, compared to bubble-like levels a year ago. Economic activity is expected to slow during H123 in developed markets, which should come as no surprise to investors. Investors are likely to be more focused on the peak in policy rates, which we expect during Q1 in the US and shortly thereafter in Europe. By mid-2023, we expect the market mood to pivot towards an economic and earnings recovery in 2024. Merely a pause in US rate increases would be a sufficient condition for this turn of sentiment, in our view. We anticipate a reduction in the intensity of hostilities in Ukraine over the full year as Russia’s military objectives become increasingly unachievable. Recent weeks have seen China abandon its zero-COVID policy and an increasingly pressing need to boost the economy could encourage the Chinese government to step back from some of its other less business-friendly policies. In a disinflationary environment, we would expect less valuation pressure on equities.
In 2022 equities underperformed even as the global economy continued to expand because equity discount rates rose from abnormally low levels. From current valuations, we expect 2023 will be a better year for global equities and would caution against overly pessimistic positioning. With a slowing in the pace of US rate increases in prospect, we also expect upward pressure on the dollar to moderate, benefiting non-US equities. It may be too early to turn aggressively positive on equities as earnings forecasts continue to fall. Therefore, we start the year with a positive view on equities to benefit from lower equity valuations but with a defensive company and sector bias. Once the full extent of the slowdown becomes clearer, it may be time to become more positive still on risk assets. At 3.75%, US 10-year government bond yields appear balanced between slowing growth and elevated but slowing inflation and we have a neutral outlook on this asset class.
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Metals & Mining