PERSPECTIVE3-5 min to read

With recession looming, where to capture opportunities?

24/02/2023

Authors

Chloe Shea
Investment Director, Multi-Asset

2022 has proven to be a difficult market environment for investors investing in equities and bonds. However, following the unsatisfactory performance and significant falls in 2022, we are seeing some attractive opportunities coming ahead in 2023.

In terms of the macroeconomic backdrop, broadly speaking, we expect 2023 to be one of recession for the advanced economies with the eurozone now expected to join the US and UK in recording a fall in output. However, markets always move ahead of economic news. Therefore, investors should stay invested in 2023 as we discover more bright spots in the investment world.

Fixed income was the epicentre of weakness in 2022, however, with the recessionary risk this year, we believe that this asset class offers an attractive source of yield and diversification benefit to portfolios over the short run. After aggressive tightening from central banks, we believe the Fed’s hawkish tone will shift towards a more balanced assessment, as inflation continues to fall from elevated levels. As we anticipate an economic slowdown this year, we believe bonds may start to react more towards growth concerns amid short positioning in the market. As such, we are starting to move positive on duration.

On the equity front, we are holding onto our views that the peak in rates has taken some pressure off equity valuations, which brings a tactical window for equities to perform. Among developed markets, we prefer European equities especially when compared to the US. The Eurozone economy has been surprising to the upside, an ease of energy crisis given a mild winter, better-than-expected manufacturing data, as well as attractive valuations are among positive catalysts albeit recession remains a key risk to monitor. On the other hand, we are holding a negative stance on US equities as corporate earnings expectations are still looking a bit optimistic, and multiples may be further challenged by the withdrawal of liquidity given Fed’s quantitative tightening. We are also staying cautious on Japan. The Bank of Japan’s surprise move to widen the yield curve control band has led to Japanese Yen’s appreciation and tighter financial conditions. With improving wages growth and a new Bank of Japan governor, we believe the outperformance of the Japan stock market, led by the weaker currency, may start to unwind.

In terms of Asia, we favour mainland China and Hong Kong equities given the expectation of a rebound in economic activities. China’s pro-growth policies are expected to boost markets’ sentiment within the region and support selective industries to perform well. After a couple of difficult years for mainland China and Hong Kong equities, we believe that the attractive valuation, coupled with the expectation of a recovery in economic activities, can drive earnings revisions upward with the support of policies and liquidity.

Overall, at this cyclical juncture, we expect to get some relief on inflation but remain alert to signs of recession.

Authors

Chloe Shea
Investment Director, Multi-Asset

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