PERSPECTIVE3-5 min to read

Webinar: Market update and economic outlook

After last year’s sell-off, opportunities are emerging across asset classes.

26/01/2023

Authors

Caspar Rock
Chief Investment Officer
Ahmet Feridun
Deputy Chief Investment Officer
Kate Leppard
Head of Client Service, UK Wealth Management
Christopher Lewis
Head of Investment Strategy, Wealth Management

Economic outlook

After a difficult year, global equity markets have started 2023 on a stronger footing. US inflation appears to be cooling, suggesting that the Federal Reserve may not have to raise interest rates much further.

However, leading indicators still suggest that a recession is likely in the US this year. The key question is when this recession will start, how long it will last, and how deep it will be.

Markets are taking a relatively optimistic view and pricing in a shallow recession. There are some reasons to support this view. Both the US labour market and services sector are proving relatively resilient, despite the rate increases we have seen over the past year.

Globally, the faster-than-expected re-opening of the Chinese economy could also lead to an improved outlook for global growth.

A high-speed cycle

Over the past three years, we have seen recession and recovery and are now close to recession again. Normally, an economic cycle takes seven to ten years. This fast-paced cycle requires an active approach to investment.

The good news is that we now see far more opportunities in markets than at the start of 2022.

Bond prices have fallen as yields have risen, leaving valuations at their most attractive level in over a decade. In 2022, bonds and equities fell in tandem. However, this year we expect to see more usual trading patterns re-emerge, with bonds rising as equities fall and vice versa. This means that in addition to offering higher yields, bonds should also do a better job of protecting portfolios in the event of equity market volatility.

We reduced exposure to equities throughout 2022 but are now looking to add back to the asset class. We remain on the sidelines for now, however. Our key concern is expectations for corporate earnings. Analysts continue to forecast a slight rise in earnings in 2023, which appears overly optimistic as we head toward a recession.

We are also considering adding to commodities. The energy transition will drive long-term demand for metals and other commodities. There may be near-term tailwinds from China’s re-opening, given that the country still accounts for the majority of demand in some commodities. We could also see higher commodity prices as a result of any escalation of the conflict in Ukraine.

The outlook for the UK

The UK has been hard hit by all of the challenges facing the global economy at the moment: high inflation, low growth, and supply chain disruption. It also has to fund significant budget and current account deficits.

Sterling has recovered from the lows of last year, but only slightly. We do not anticipate a significant rebound while the UK faces these challenges. Having said this, we do not expect the dollar to strengthen significantly this year either.

Restoring productivity growth is key to the UK’s fortunes but it will take time to make any meaningful gains. Whoever wins the next election will face a challenging in-tray.

There’s one silver lining amid the relatively gloomy outlook for the UK: its small- and medium-sized, listed companies are very attractively valued. If the country’s economic prospects do improve, there is significant scope for recovery.

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

 

Authors

Caspar Rock
Chief Investment Officer
Ahmet Feridun
Deputy Chief Investment Officer
Kate Leppard
Head of Client Service, UK Wealth Management
Christopher Lewis
Head of Investment Strategy, Wealth Management

Topics

Perspective
Global Market Perspective
Economic views
Economic & Strategy Viewpoint
Thought Leadership
Politics
Inflation

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at 40 Esplanade, St. Helier, Jersey JE2 3QB, (No.31076).

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.