Schroders top 10 predictions for 2023: Favours short-duration high yield bonds, Hong Kong and mainland Chinese equities, clean energy


Schroders today revealed its top 10 predictions for 2023 across various asset classes, which highlights the importance of a dynamic asset allocation and diversification investment approach in the face of economic headwinds.

Over the course of 2022, global asset returns are among the worst on record, and challenges have persisted. Although markets are likely to remain volatile, investors can sit up and take heed of the opportunities that lie ahead.

Keiko Kondo, Head of Multi-Asset Investments, Asia at Schroders, said the overall market outlook for 2023 will largely depend on the direction of US Fed monetary policy, which the firm sees pivoting, and whether or not a global recession would become a reality, which the team considers likely. Yet, she believes that recession may not necessarily be bad for all markets since financial markets tend to be forward-looking and are likely to have already priced in much of the negative impact.

Schroders has turned overweight on high-yield debt, particularly that of a shorter duration, given that valuations are compelling and a strong carry opportunity that will drive returns exists.

The firm also favours investment-grade bonds as well as Hong Kong and mainland Chinese equities. The Japanese yen is expected to regain its safe haven status, while clean energy as an investment theme looks promising. Alternative assets could also add another layer of support to investor portfolios.

Kondo said:

With inflation yet to cool down significantly, global central banks are likely to press ahead with more rate hikes before a pivot, weighing onto economic growth prospects. We see market expectations of a peak in US interest rates at close to 5% as being appropriate, after which the pace of hikes will likely slow. Under such circumstances, investment-grade credit and short-term high-yield bonds with sound fundamentals can be two sensible choices for exposure in investment portfolios in the year ahead. In addition, US TIPS (Treasury inflation-protected securities) can be included as a tool for protection against inflation.

Schroders expects 2023 to usher in a turning point for global equities after the sharp corrections seen year-to-date this year. Valuations are now at more attractive levels where investors may look to quality companies across markets for opportunities when the time is ripe, subject to recessionary risks and currently over-optimistic expectations on corporate earnings. Supported by liquidity and growth, Hong Kong and mainland Chinese equities stand a good chance of outperforming its peers, especially emerging markets.

Kondo added:

“Investors can prepare to enter the stock markets as signs of bottoming out emerge. We tend to focus on resilient companies that are of high profit margins and low leverage ratios. Usually, these are quality stocks that can generate profits even in tough, recession-prone environments.”

Despite lingering uncertainties, investors taking a long-term thematic view may find themselves rewarded as they tap into opportunities associated with structural trends.

For instance, the Russia-Ukraine conflict has clearly fast-tracked energy diversification and transition in many markets. Clean mobility and energy efficiency are some of the key areas that are poised to benefit from increases in renewable power expenditure and green stimulus approved by governments to date.

wind and solar power investment expenditure to rise

Schroders expects a reversal in the performance of global currencies in 2023, where the US dollar may weaken. On the other hand, the Japanese yen may regain its strength, providing a hedge against the impact of a semiconductor downcycle on other Asian economies and currencies as the Bank of Japan intervenes by reducing its foreign exchange reserves.

Finally, the firm sees alternative assets, such as property and infrastructure, as being a crucial asset class for investors seeking to diversify their investment portfolios.

Keiko Kondo said:

“The performance of alternative assets is less correlated with other major asset classes. Their importance is even more evident during volatile times.”

top 10 predictions

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