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Credit Suisse Investment Outlook 2023: Fixed income assets provide investment opportunities in a new world order
According to the Credit Suisse Investment Outlook 2023 published today, the year ahead will see low global economic growth of merely 1.6%. Although central banks will likely slow or end monetary policy tightening in 2023, we expect no rate cuts in any of the major economies. Against this backdrop, fixed income assets are likely to offer attractive opportunities for investors, while equity performance is seen staying muted, at least in the first half of the year.
After a challenging year in 2022, which saw persistently high inflation, aggressive central bank tightening and slowing growth, Credit Suisse expects 2023 to see recessions in the Eurozone and UK, and a growth recession in China. These economies should bottom out by mid-2023 and begin a weak, tentative recovery – a scenario that rests on the crucial assumption that the USA manages to avoid a recession. We expect economic growth to generally stay low in 2023 against the backdrop of tight monetary conditions and the ongoing reset of geopolitics.
Michael Strobaek, Global Chief Investment Officer at Credit Suisse, said: “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. To manage this difficult environment, it is key to adhere to robust investment principles, follow a stringent investment process aligned with investors’ long-term financial objectives and seek broad diversification including alternative investments.”
Nannette Hechler-Fayd’herbe, Chief Investment Officer, EMEA and Head of Global Economics & Research at Credit Suisse, stated: “We believe the global economy has undergone a fundamental reset in recent years due to the pandemic, shifting demographics and weakening business investment in the wake of geopolitical ruptures and the effects of climate change. The fallout is evident in our longer-term forecasts for the global economy, which we expect will grow at a much slower pace. We expect inflation to remain above central bank targets in 2023 in most major developed economies in 2023.”
Outlook for the major economies and currencies
- United States. Credit Suisse expects US growth to average 0.8% in 2023. The probability of recession is high (above 40%), but still not our base case. Inflation is beginning to moderate, but core personal consumption expenditures (PCE) inflation is likely to remain stubbornly high at around 3% as of year-end 2023. We thus expect the Federal Reserve to continue to tighten aggressively, up to a terminal rate of 4.75%-5.00%.
- Eurozone. We believe the Eurozone will remain in recession until late Q2 2023 and post growth of -0.2% for the full year 2023. Headline inflation may be peaking but is likely to decline only gradually. We expect persistently high inflation and currency weakness to push the European Central Bank to hike rates aggressively to a terminal rate of 3% by early 2023.
- Switzerland. We believe the Swiss economy will avoid recession and grow by 1% in 2023 thanks to still solid private consumption. Inflation is expected to slow further in 2023. We expect the SNB to raise its policy rate by another 0.5% until March 2023 and then keep it at 1% for the rest of the year.
- China. We forecast below-consensus growth of 4.5% for China in 2023. Lower growth potential, fiscal consolidation and a slow shift away from the government’s zero-COVID policy are likely to constrain the economy. Our expectation is that any meaningful reopening will happen only toward the end of Q1 2023.
- Japan. Japan’s economy is likely to see low growth of 0.5% in 2023. Inflation is likely to remain above 2% through H1 2023. We think this, as well as downward pressure on the JPY due to the hawkish Federal Reserve, should lead the Bank of Japan to adjust its policy of yield curve control in early 2023 to allow for slightly higher yields.
- UK. The UK entered a recession in Q3 2022. The UK economy is expected to continue to contract through most of 2023.
Outlook for the main asset classes
- Equities are likely to deliver a muted performance in the first half of 2023, as focus remains on the “higher rates for longer” theme. Sectors and regions with stable earnings, low leverage and pricing power should fare better in this environment. Once we near a pivot by central banks interest-rate-sensitive sectors with a growth tilt may become more attractive again.
- With inflation likely to normalize in 2023, fixed income assets should become more attractive to hold and offer renewed diversification benefits in portfolios. US curve “steepeners,” long US vs. Eurozone duration government bonds, emerging market hard currency debt, investment grade credit and crossovers should offer interesting opportunities in 2023.
- In early 2023, demand for cyclical commodities may be soft, while elevated pressure in energy markets should help speed up Europe’s energy transition. We think the backdrop for gold should improve as monetary policy normalization nears its end.
- In alternative investments, we expect the environment for real estate to become more challenging in 2023 amid headwinds from higher interest rates and weaker economic growth. Further, we see opportunities for active management to add greater value, particularly for secondary managers, private yield alternatives and low-beta hedge fund strategies emerge.
Download the Credit Suisse Investment Outlook 2023 here.