Here’s what some of the leading research analysts think is going to happen to the markets in 2023

Over the holidays, I read through eight research reports (so you didn’t have to) on what the global economy and markets will look like in 2023, based on what central banks may do and the resulting impact on the economy. The key themes and expectations for the year emphasise the divergence in views across the reports.

The good

(1) [Maybe] equity markets have already priced in most of the risk: both stocks and bonds seem to have pre-empted macros troubles set to unfold in 2023 and look increasingly attractive, notes the most bullish report of the pack (J.P. Morgan). The report highlights higher conviction in cheaper stocks which have already priced in a lot of bad news (including further downgrades to consensus forecasts beyond current consensus) and are offering dependable dividends: concluding that overall the worst of the market volatility is behind us and both stocks and bonds look increasingly attractive

(2) It’s not all bad news for private equity: Although market characteristics which have helped momentum in private equity markets (low inflation, multiple expansion, low financing costs) are reversing, Apollo notes that there remain several attractive opportunities for private equity:

• Value creation based on a disciplined approach to valuation (i.e. buying low), operational improvements and cashflow generation
• Public-to-private (P2P) transactions as valuations fall in the public markets and Boards fight to sustain share price momentum against a volatile market backdrop
• Corporate carve-outs are likely to become more common as CEO confidence continues to decline and companies look to improve their liquidity positions

(3) US remains the promised land: Apollo’s report indicates that although the probability of a recession is rising, particularly in Western Europe because of the added pressure from higher commodity prices, and the global economy is slowing, areas of resilience could support a soft landing, especially in the US

(4) Emerging markets are a now good place to be: Morgan Stanley (with the most frustrating report format I have ever had to struggle through — pls fix) notes that despite better growth, less debt and lower inflation, emerging market (EM) equities are trading at crisis-level valuations today, which makes it an attractive entry point.

Citi also examined that US-China technology decoupling is at the intersection of the unstoppable trends of digitization and G2 polarization, creating potential investment opportunities on both sides of the competitive divide.

(5) Saving the world is still a good thing (for your life and portfolio): investing in technology and companies making the world a better place, and aligned with enduring market trends is still a good strategy, indicates the BNP Paribas report: ‘Industry 4.0’ — involving advances such as smart factories, autonomous systems, 3D printing and machine learning — promises to provide us with the tools for a replenished biosphere, greater energy and food security, and improved living standards and job opportunities.

Apollo also concedes that higher energy prices will continue to accelerate the energy transition as well as investments in green energy and renewables. BlackRock notes that global transition could accelerate, boosted by significant climate policy action, by technological progress reducing the cost of renewable energy and by shifting societal preferences as physical damage from climate change — and its costs — becomes more evident (as Europe is already seeing). Regulatory changes, including The European Union’s (EU’s) REPowerEU plan and the US’s Inflation Reduction Act, will both also act as tailwinds for the sector.

The bad

(1) How do we fix what we don’t understand: Whether the central banks are doing the right thing isn’t so sure, either, given the root cause of persistent high inflation is not as obvious as it seems: Apollo explains that the strategy of ‘demand destruction’ being pursued by the central banks is designed to combat inflation caused by higher disposable income-led excess demand, however, if this was the case, a much more aggressive fiscal response in the US amidst COVID should have led to higher headline and core inflation in the US than in Europe.

A similar path of inflation, despite the much more aggressive fiscal response to COVID in the US than in Europe, suggests the above is likely not the case. Therefore, supply-side (such as supply-chain struggles fueled by COVID) must have also had an impact. If the latter was the key driver, then perhaps the logical central response may have been to wait it out as these issues resolved themselves. The right strategy for a soft landing is thus difficult to determine without being sure of the cause and makes it even harder to forecast the trajectory of inflation.

BlackRock expects that central banks would eventually back off from rate hikes as the economic damage becomes reality, but while inflation might cool, it would stay persistently higher than central bank targets of 2%.

(2) [Maybe] equity markets have not priced in all the risk: the market bears disagree that the worst is behind us on how far the equity markets are yet to decline. With the stock market’s resurgence, from October-2022 lows, BlackRock cautions that stocks are even further from pricing in the recession — and earnings downgrades — they see ahead. While the consensus expects earnings growth of just over 4% in 2023, down from about 10% at the start of 2022, BlackRock expects zero growth.

(3) Historic trends and conventional wisdom is against us: it is an opinion often acknowledged that the past is not necessarily a good predictor of the future. However, Citi reports cautiously that over the past 100 years, no bear market associated with a recession has bottomed before the recession has even begun. ‘This time is different’ may not be true.

The conventionally accepted investment rationale for the classic 60% stocks / 40% bonds portfolio, BNP Paribas notes, is that it will deliver solid if not spectacular returns. As of October 2022, however, the 60/40 portfolio was on track to match its worst year for performance since the Second World War due to sharply rising bond yields.

(4) Europe is heading for a bleak winter: BNP Paribas summarises the dismal picture: inflation is in double digits in some countries, consumer sentiment has collapsed, and demand is weakening along with disposable income. Citi highlights that with high commodity prices from the war in Ukraine, and its position as a large exporter of goods and services, Europe will be impacted by the expected slowdown in global economic activity, even if recent currency depreciation against the dollar cushions the blow. Bottom-up analyst consensus forecasts expect European ex-UK EPS to grow 2.1% in 2023 after rising 15.8% in 2022.

Credit Suisse also forecasts recessions in the Eurozone and the UK but expects the economies should bottom out by mid-2023 and begin a weak, tentative recovery.

(5) A losing game for price takers: life has always been tough if you are a price taker in the market, but two of the reports (Citi, Morgan Stanley) note the importance of pricing power and margin developments as elevated inflation is likely to persist for longer at a global level into 2023, which means if you don’t have the ability to pass on the rising costs to customers, life is only going to get tougher.

The not-so-ugly

The majority of analysts expect a softer-than-historically-has-been-seen landing for the global economy, but the reports are decidedly split between whether or not there will be a recession in 2023. However, J.P. Morgan, which (in a separate analysis) surveyed 170 investors for their views, found that >95% of investors expect a recessionary environment in the next 12 months, and as a result, investors would like to see companies shore up balance sheets with 80% preferring a cash runway >18 months.

Despite everything, one thing is certain: expectations are wide-ranging and given the last few years have been anything but predictable, what 2023 brings may confound even the surest of the analyst views above.

Note: the above is a consolidated summary of the individual reports, not investment advice. It does not reflect my personal views or the views of my employer.

Links to the reports: Apollo, Goldman Sachs, J.P. Morgan, Morgan Stanley, BlackRock, Credit Suisse, Citi, BNP Paribas