Page 8 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

autumn. Here too, yields should fall from prevailing levels as
risk premia fade. Political uncertainty, although diminished, KEY TAKEAWAYS:
has not gone away completely. The Conservative administra- • Stock and government bond markets are sending
tion is trailing the leading opposition parties by a wide margin differing signals regarding the outlook, reconciling
in opinion polls, and an election must be held before early this divergence will drive asset performance in 2023.
2025. • The combination of persistent inflation and
aggressive interest rate hikes are thought likely to
DEVELOPED MARKET EQUITIES induce a recession across Western economies outside
Despite the welcome rebound across developed global equity the U.S., albeit relatively shallow.
markets, we enter 2023 defensively positioned with a prefer-
ence for specific themes (renewable energy, energy • Inflationary pressures should dissipate as 2023
infrastructure rebuild) and for sectors and stocks thought more progresses, allowing central banks the latitude to
resilient to the economic cycle. pause interest rate hikes and eventually pivot lower,
albeit that the latter’s timing will likely vary by
The reason for this is that investors’ earnings expectations, geography.
despite a falling trend, are still too optimistic, given the
subdued global economic backdrop. A global economic • The ensuing economic recovery is likely to be rapid,
recession, albeit shallower than those of the recent past, will assisted in due course by central bank policy easing.
weigh on the more economically sensitive sectors, and thus we • Although residual headwinds may limit near-term
anticipate that lowered expectations for both the corporate top progress, as 2023 unfolds so government bond yields
and bottom lines will act as a significant headwind, at least should fall, closing the year lower than end-2022
over the first half of 2023. levels. After a mixed start to the year, stock market
upside momentum should build in the months ahead
Admittedly, any central bank pivot could place downward and on into 2024.
pressure on real yields and prove supportive to equity valua-
tions. But whilst limiting overly aggressive downside, history
confirms that valuations have tended to fall at the onset of a
recession as the deterioration in risk appetite more than
outweighs the offsetting impact of any decline in safer asset
yields. However, equity markets are discounting assets and
inhabit the future as much as being informed by the present.
As 2023 progresses and the dark clouds shrouding the global
economy begin to disperse, we expect the outlook to become
more constructive for risk assets.
Benchmark equity indices should stage a decent rally into
end-2023 and build on those gains into 2024.

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