A time for prudence

If 2022 confronted investors with stiff headwinds, 2023 is likely to be challenging as well. After all, financial conditions are all but certain to remain tight and the fundamental reset of macroeconomics and geopolitics is continuing. Investors would thus do well to adhere to a robust investment process and diversify investments broadly, particularly as the transition out of negative rates is behind us. Our House View provides a valuable compass in this regard.

The year 2022 presented investors with a particularly difficult environment. Inflation was a concern going into the year, and the onset of the war in Ukraine drove price levels up further. In response, central banks, first and foremost the US Federal Reserve, brought forward rate hikes and have all but demonstrated their determination to bring inflation down by tightening monetary policy aggressively. Indeed, they will not be able to slow the pace of rate hikes before realized inflation falls persistently.

All the while, growth has been slowing, with the Eurozone and UK even likely to have slipped into recession.

Looking ahead, we expect financial market volatility to remain elevated as risks persist and global financial conditions remain tight. This is likely to create continued headwinds to growth and, by extension, risk assets. Nevertheless, investors can find opportunities, particularly in fixed income, as we show in this year’s Investment Outlook.

I believe that recent months have clearly reiterated the importance of adhering to robust investment principles, following a stringent investment process aligned with one’s long-term financial objectives and seeking broad diversification, including alternative investments. Preserving wealth is our singular focus, and we remain fully committed to this goal as the fundamental reset continues.

Reset is the new reality

The “Great Transition” that we foresaw for 2022 has played out to a much greater extent than we originally envisioned, resulting in a new reality.

Over the past year, geopolitics has made a come- back as a key driver of the global economy. The confrontation between the West and Russia over Ukraine has triggered an energy crisis as well as soaring food prices.

Far from normalizing, international commerce has reorganized according to political alliances, marking the dawn of a multipolar world.

This has resulted in a new economic reality with more elevated inflation and a monetary policy regime prioritizing inflation stability over growth. As a result, interest rates are at their highest in years and economic growth is slowing.

Financial markets could not evade these developments, with equities and bonds firmly in negative territory in 2022. Bonds were unable to act as an effective source of diversification within portfolios (their traditional role), as there was a stronger correlation between the two asset classes due to the turbulent macroeconomic environment and tighter monetary policy regime.

Which leads us to the outlook for 2023: we believe the global economy has undergone a fundamental and lasting reset due to the COVID-19 pandemic, shifting demographics, climate change, weakening business investment in the wake of geopolitical ruptures, among other trends. The fallout is evident in our longer-term forecasts for the global economy, which we expect will grow at a much slower pace than in the 2010–2019 period. Inflation will remain an issue in 2023, though we expect it to eventually peak and start to decline.

As for financial markets, as inflation peaks and monetary policy reaches restrictive territory, fixed income should become more attractive again. This means that the performance of bonds and equities should again diverge, as we expect equity markets could still be volatile in the first half of 2023 as slower economic growth hits company earnings.

We hope you find the insights in our Investment Outlook 2023 useful, as you navigate and adjust to this reset.

Source: Credit Suisse - 29 Dec 2022