Will 2023 turn out to be another year denting the portfolio values? Both equities and bonds turned out to be negative and the popular 60/40 strategy also failed to salvage the investment portfolio for the investors. The factors at play last year may not seem to fade out entirely in 2023. From Fed’s monetary policy, inflation, recession, and dollar index to corporate earnings and management guidance – the global focus will remain on these factors, notwithstanding a ‘Black Swan’ event.
Standard Chartered, in its Outlook 2023 report, is underweight global equities. The report also puts forth the bullish and the bearish factors impacting specific markets like the US, China, Japan, and Europe. Excerpts from the report:
We enter 2023 underweight Equities given our central scenario for a recession in the US and Europe. Central bank tightening and weakening consumption patterns are likely to pose downside risks to earnings estimates on a 12-month horizon.
We are overweight Asia ex-Japan, with China’s economic recovery likely to support an improved earnings growth profile. Meanwhile, potential deceleration in Fed rate hikes and a weaker USD are expected to support fund flows into Emerging Markets in 2023.
Within Asia ex-Japan, we are overweight China equities given easing mobility restrictions and favourable fiscal and monetary policies. We hold a neutral stance on US equities and remain cautious due to relatively expensive valuations and the risk of further earnings downgrades.
Elsewhere, we are neutral on UK equities, amid heightened recession worries, and underweight Japan equities as we expect a stronger JPY to hurt corporate earnings. We are neutral Euro area equities and believe bad news is increasingly priced in, and earnings are showing resilience.
ASIA EX-JAPAN EQUITIES
The bullish case
China’s fiscal and monetary stimulus
Relaxing mobility restrictions in China
High projected EPS growth in 2023
The bearish case
Chinese ADR delisting risk
Unexpected regulatory reforms in China
Supply chain disruption hurting production
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US EQUITIES
The bullish case
Recession risk is largely priced in
Potential Fed pivot
Healthy labour market conditions
The bearish case
Fed’s potential overtightening
Weakening consumption and diminishing wealth-effect
Strong USD hinders earnings
Also Read: The classic 60/40 stocks-bonds portfolio fell 22% in 2022, the largest loss since 1931
EURO AREA EQUITIES
The bullish case
Resilient margins
Extreme valuation discount
Gas reserves for the winter
The bearish case
Heightened recession risk
Geopolitical risks from Russia-Ukraine war
Still elevated energy costs
UK EQUITIES
The bullish case
Weaker GBP to support foreign revenue
High dividend yields and valuation discount
Heavily weighted towards Value equities
The bearish case
Record inflation levels
Tightening monetary conditions
Geopolitical risks from Russia-Ukraine war
JAPAN EQUITIES
The bullish case
Japan and China reopening to support
earnings growth
Attractive valuations
The bearish case
Strengthening JPY to hurt company earnings
Consumption momentum remains weak
Prolonged supply chain issues
Risk of BoJ policy tightening if inflation rises