Strategy Focus - Themes for 2023 as seen by the Eco and Strat team - December 2022

2022 in review: a missed opportunity. A year ago, our forecasts for 2022 were pretty bullish. They were quickly rendered obsolete, however, by a series of shocks that caused a slump in activity and a leap in inflation. Markets were gripped by risk aversion and few assets offered a safe haven.
 
2023 should start well for bonds. Our scenario envisages growth slowing without tipping into a major recession, inflation falling rapidly but with persistent underlying price pressures, while central banks remain watchful.  This environment, coupled with a still high degree of uncertainty, will continue to benefit bonds. Long-term rates could increase further at the beginning of the year, notably with the Quantitative Tightening policies of the central banks, before easing again with the fall in inflationary tensions and activity that would remain moderate.
 
Return to a negative correlation between equities and fixed-income. The return of growth/inflation procyclicality, with growth and inflation falling in tandem, should restore the negative correlation between equity and bond prices. This is good for portfolio managers who will be better able to diversify risks. After a first half-year favourable to bonds, equities should recover their relative appeal.
 
Positive real rates are good for defensive assets. Central banks will want to keep real interest rates in positive territory across all maturities to continue bearing down on inflation. This will favour well-rated corporate bonds and indices of value stocks.
 
Dollar likely to shed some of its recent gains. Having rallied strongly this year, the dollar is likely to slip back slightly against other currencies, notably the euro, as geopolitical and energy risks abate and markets price in rate spreads that are less favourable to the United States.
 
Emerging markets: rocky road to recovery in China, mixed picture elsewhere. China's exit from its zero-Covid policy could be a stop-start process and hampered by the weakening of its property and infrastructure sectors. Other emerging financial markets can expect to continue their relatively healthy performances over the year as the Fed (in all likelihood) slows its policy tightening, south-east Asia booms and yields remain relatively attractive. 
 
Residential property markets hit by rate hikes. In developed economies, the money households have to spend on housing is being eroded by high housing prices, inflation eating into disposable income and rising interest rates.

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