Investment Outlook 2023: Upcoming reorientation of the global economy

Investment Outlook 2023: Forecasts for targeted investments

To begin with, one thing is clear: 2023 could be a year with two sides to it, as far as financial markets are concerned. While bonds are likely to celebrate a comeback, equities will probably still face headwinds next year as well. Find out more in the Investment Outlook 2023, with forecasts for individual investment opportunities.

Bonds in the spotlight

In recent years, only a few asset classes have made a significant positive contribution to the performance of portfolios. In the midst of an environment of sustained low interest rates, expected yields have been meager at best, especially for core bonds. Now, however, the world is seeing interest rates tightened at the fastest pace in decades, and bond yields in various currencies have normalized quickly.

Core bonds, for example, are likely to play a more important role in portfolios once again in the future, particularly now that yields have reached a level that offers a certain degree of protection against negative market effects. Unlike in 2022, bond positions are also likely to offer diversification benefits once again, especially if the focus is on growth risks. Bond market volatility is expected to remain high in the near future, since yields potentially still have yet to reach their peak.

Credit Suisse makes the following forecasts for the various investment opportunities:

Fixed income

In contrast with 2022, 2023 is expected to see positive performance for global government bonds. As yields approach their cyclical high, there are also likely to be opportunities to increase the duration in bond portfolios. Together with risk assets, government bonds have also been generating weak returns because the increase in inflation has driven up key interest rates and the yield structure as a whole. As inflation slows, government bonds in multi-asset portfolios are likely to offer valuable diversification benefits.

US Treasuries

On the major markets, USD fixed income positions are showing greater earnings potential than EUR bonds. The US Federal Reserve (the Fed) raised interest rates earlier and more dramatically than the European Central Bank (ECB). The ECB needs to catch up, especially as the euro zone is facing higher inflation and uncertainty about energy prices over the winter. Inflation and the weak euro will most likely force the ECB to raise interest rates aggressively, even in a recession. In view of the interest rate differences and the differing prospects for further tightening, US Treasuries are exhibiting greater earnings potential than government bonds from the euro zone.

Financial markets in 2023

Financial market in 2023: asset class trends

Source: Credit Suisse

High-yield bonds

The US high-yield segment features attractive fundamentals and a healthy market structure. Since only a few bonds will need to be refinanced in 2023 and the spreads adequately compensate risk, among other factors, the realized default rate will most likely rise only slightly and reach the historical average of 5%. This means that it would remain below the current implied probability of default of more than 6%. In emerging markets, the realized default rate in the high-yield segment reached a high of over 10% in 2022 due to the war in Ukraine. Apart from this extreme situation, the realized default rate remains low.

Emerging market bonds

Despite the difficult environment, attractive returns are expected for hard currency bonds from emerging markets. Their substantial coupon income – with yields approaching multi-year highs – is likely to cushion worsened risk sentiment. Valuations remain attractive, and the fundamentals are holding up better than those in industrialized countries. In addition, they also already seem to be reflecting a downturn or potential recessive pressure. On average, the interest rate increase cycle is further advanced than in industrialized countries.

Equities facing headwinds

The environment remains challenging for equity markets, since the nominal economic growth rate is expected to slow substantially, thereby reducing revenue growth potential. Furthermore, close to record-high corporate profit margins will likely come under pressure and start to reflect various cost pressures, including the energy price shock, higher wages, and more expensive financing costs.

Impact of real interest rates on equity valuations

Rising real interest rates impact equity valuations.

Last data point: November 7, 2022
Sources: Refinitiv, Credit Suisse

Although most of the depreciation is probably already behind us, a significant rise in equity valuations is unlikely unless central banks change their rhetoric. However, a reversal may occur in the second half of 2023. Until then, fluctuating and rather weak equity returns can be expected. For these reasons, Credit Suisse is focusing on defensive sectors and regions with stable margins, robust gains, and low debt until that point. In the event of a change in monetary policy, a shift to interest-rate-sensitive, high-growth sectors, such as technology, is likely to be worthwhile.

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