Key Investment Views for 2023

The following are some key investment views for 2023.  2022 was a year most asset allocations lost value.  Diversification was muted since most major asset classes were down for the year.  On the macro front, I expect US growth to stall, corporate profits to decline and associated cost cutting will result in higher unemployment rates.  All this could lead to a recession near the middle of the year.  Inflation is expected to gradually drop to saner levels, which means the Federal Reserve will pivot away from higher interest rates to a holistic monetary policy to either stave off or mitigate the projected recession.  Against this backdrop of deteriorating growth profile and higher unemployment, the Federal Reserve is expected to be less hawkish, and put downward pressure on interest rate.  This will result in a a re-steepening of the yield curve. 

Considering this, there will be plenty of opportunities for asset classes to make a strong turnaround. This will begin with rated sovereign bonds, particularly, US Treasury bonds.  This will eventually include global and Asian equities and high yield credit.  This recovery will be staggered across regions and asset classes, and this will be challenging to predict.  In 2022, Market reaction was driven by inflation.  2023 will probably be influenced by the same factors for the first half of the year only.  In 2022, the yield curve moved higher and inverted.  Equities de-rated via contracting valuations caused by higher discount rates.  In 2023, I would expect that the central banks will be less concerned with inflation, and focus on growth to prevent a stalled economy.  Sectors and industries that are more resilient, such as defensive and non-cyclicals, are expected to outperform in the first half.  In contrast, cyclicals and growth companies should lead a strong recovery towards the latter half. 

In the larger asset allocation picture, it is advised to maintain an underweight stance to equities for the short term.  Even as economies transition from inflation concerns to growth concerns, this does not change equity thesis.  Sovereign bonds are another matter altogether.  From a tactical perspective, it is advised to increase the duration exposure to take advantage of expected declining yields. 

In 2022, inflation made cash and money market attractive.  Most money market funds yielded above 4%.  From a strategic asset allocation perspective, it makes sense to maintain some cash in the portfolio because of the positive yields and almost no downside risk.  Sovereign bonds, particularly US Long Treasuries, look attractive after briefly exceeding above 4% in October 2022.  That is a level unseen since the global financial crisis of 2007/2008.  I expect 2023 to be disinflationary.  As such, the US yield curve will naturally re-steepen.  Yields will fall across the curve, the front-end falling more to reflect a dovish shift in the Federal Reserve’s sentiment. 

Because of this macroeconomic situation, I expect equities to underperform, especially during the first half of the year.  This will eventually rise towards the middle of the year.  Forward price equity-ratios are relatively high.  Real rates are expected to stay above 1% for most of 2023.  Valuations are likely to compress further from here.  Equity capitulation are almost always found in the middle of the recession, as peak bearishness entrenches in the markets.  Equities usually rebound once investors start to look at long-term prospects. 

I have a preference for Asian equities over developing market equities, but that is a personal bia, because I am bullish on East and Southeast Asia over an extended investment horizon.  China’s reopening is well underway.  Relaxation in other policy areas are explicitly stated.  Because of this, Chinese equities will continue to rise.  Valuation is currently around 12x, below 5-year average of 13.5x, which is far from being demanding.  The negative earnings revisions have bottomed out, for both earning per share and revision breadth.  They have started to trend upward from trough.  This uptrend will be boosted by an ongoing macroeconomic rebound.