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Will 2023 be the Year of Recession or Recovery?

Jan 30, 2023 | 6min read

The year 2022 has been challenging for investors. All asset classes suffered with USD30 trillion vanished last year as the global bond market took its largest fall since 1992 (MSCI World index dropped 20% ), with government bonds yield reaching a multiyear high (10 years US treasuries raised from 1.6% to 4.3% ); non-US currencies sinking to a 40-year low; and the global equities market dropping an estimated 20% – 30% by end October 2022.  Against the backdrop of this double-digit drawdown, the optimal outlook for 2023 would be a recovery year for many assets classes like Chinese equities, global bonds, and non-USD forex. For Europe and the US, however, it could still be a year of economic recession. 


With so much going on, what are the key trends expected to impact an investor’s decision making? To help investors better navigate the shifting wealth landscape, WRISE has compiled the essential investment considerations that are worth noting for the new year. 


7 Essential Investment Considerations for 2023 


1. Inflation and recession are inevitable despite central banks pulling out all stops  

Central banks are expected to continue hiking rates to stem inflation, leading to overall tightness in financial conditions and impacting various asset classes, particularly equities. Importantly: The Europe region has reopened earlier than other economies during this mild winter and economic activities have held up relatively well. Together with its liquefied gas and energy subsidies to the US keeping energy prices down, we do not expect Europe to fall into deep recession. The US Federal Reserve (FED) will continue to raise rates to eventually lead the US economy into a recession by the second half of 2023. However, this rate hike cycle may soon end as signs of easing inflation emerge. 

The first half of 2023 would see investors approaching the Chinese market with caution as they monitor the economic impact of China’s reopening. Since end-October 2022, the Chinese government has implemented various policy changes to revitalise the country’s GDP growth. Some of the positive outcomes include the roping in of the central bank, the big four banks, AMCs, and insurance companies to support real estate bond insurances; the revision of zero-Covid policies in favour of economic reopening; and the introduction of more stimulus to keep inflation manageable.  


2. Supply chain volatility remains pegged to pandemic and geopolitical challenges  

Uncertainties in the supply chain remain a concern, as global pandemic and geopolitical challenges not only raise commodity prices, but also ripple various issues like material shortages and delivery bottlenecks to all parts of the world. With intra-APAC trade expected to rise in 2033, regional supply chain disruptions could also impact local economies. To reflect a bullish view on oil, we favour Fixed Coupon Note (FCN) with a 9-month tenor on WTI. The client can receive a 12% p.a. coupon for a 100% strike with 60% European knock-in. The client may also consider a 3-month FCN on CNOOC and Occidental Petroleum with 12% p.a. coupon and 81% strike. 


3. Asian markets will go on a cautious rebound 

Since November 2022, Asian markets such as China have seen upward momentum that outperformed other markets, and this is expected to continue into 2023. China, in particular, is expected to see better stability in government management, after policies announced at the 20th National Congress of the Chinese Communist Party in October 2022 took effect. We believe Hong Kong equities are a little overshot and expect corrections in February and March. 


Investors can enter risk reversal trades on large cap names (via call spread financed by selling OTM puts) to take the exposure. India is another market to allocate for based on fundamentals but would wait for better entry levels. 


4. Equities have taken a hit but opportunities remain  

Equities will rally until the first half of Q1 2023, before adjusting on back of weaker earnings and a persistent rate hike from the US FED. We are more bearish in US equities as forward earnings are now priced at an unrealistic 5% decline. This is too little compared to previous crises which declined 10% – 20%. Hence, we expect a bigger adjustment to occur in the Q2-Q3 time frame. Likewise, the global equity market should perform better once the FED decides to halt the rate hike, expected to be around the second half of 2023. 


Hong Kong and China are in a better position since revaluation began in end-October 2022. Policies changes and the introduction of more stimuli would support the already oversold equity markets. The recent policy move in property sector might be late for offshore markets, but confidence is being restored and sentiments are improving. The CNY and HKD will remain strong, and more funds are expected to flow from Asia, Europe, and the Middle East, all of which will also support the equity markets. 


Investors should continue a tactical overlay via hedges to protect downside via put spreads or OTC puts/calls with barriers to cheapen the option. There are opportunities in the first two quarters to take advantage of entering tactical trades, especially around earnings season, into good quality companies with strong cash flows. Energy, material, and financial companies, as well as large cap technology names, look interesting. 


5. Fixed income shines on high grade short duration bonds 

Cash and T-bills would continue to be an important asset class into 2023 where short-term deposits and T-bills are generating close to 450 basis points (bps). Investors can choose to park cash into these instruments with the intent to enter tactical trades during the year. 

The USD yield would go higher this year as the FED continue its rate hike. The spreads of credits have widened as global high yield reached 1,000bps. The 2s vs 10s treasury spread would continue to be inverted as it is likely the US would likely fall into a mild recession in Q4 2023. 


We believe that selective Asia investment grade bonds and those from some high-quality Chinese issuers would benefit from the recent changes in Chinese policies for economic reopening and the real estate market. The outlook on sovereign bonds remains positive as the base rate is high enough to revisit government bonds. The long end though, would likely stabilise only in the later part of 2023, with the end of the rate hike cycle. For now, we would keep the shorter duration as a conservative approach as the long end curve exposes several foreseeable risks, including continued supply risk from various governments; inflation risk that could force more rate hikes; the ageing population lowering savings and driving up long end yield; and the central bank offloading bonds balance sheets. Investors can also access IG credit trades linked to floating rate coupon which would benefit in a rising rate environment and has a pickup over equivalent reference entity.  After the worst year on record for global fixed income, 2023 will, perhaps be in more favourable to bonds market. European IG AT1s are coming in at an attractive spread while rates volatility is likely to persist in near term. The returns outlook for high-quality fixed income appears more appealing and it would be prudent to purchase quality IG names now to lock in 5-6% p.a. return for the next 2 years. 


In the future years, the long end curve would stay above 3% and risk and reward would not be high in times of uncertainty, particular for the equities and bonds correlations which are always positive in recent years. Hence, we favour high grade short duration bonds. 


6. Strategise a game change that includes rebalancing and reallocation 

Investors should rebalance their fixed income exposure to rotate from high yield into longer dated investment grade bonds as they do better during a recession. In this environment, it would be best to improve the credit quality of the portfolio. IG spreads have doubled over the past one year providing attractive carry in portfolios. European IG and US IG can be considered with EM sovereign bonds overlay. Investors should also continue to allocate into alternatives such as CTAs hedge funds with low correlations to markets. 

For market-neutral plays, client can consider the 2-year outperformance note on the Shiller Index over S&P Index with 100% minimum redemption at maturity. The YTD Shiller Index continues to outperform SPX by 3.5% in year 2023. 


7. Foreign exchange could emerge as an investor’s playground  

The US Dollar Index seems to have peaked, and it would make sense to sell short term puts on the G8 currencies such as the US dollar and the Swiss franc, which could trade within a range and receive premium. If the inflation drags on through 2023, commodity prices such as oil would emerge as one of the winners, especially in the second half of the year. 

The CNY would remain flat as it is seen as an alternative currency with stable rates, economic growth, and inflation. In the recent flow, we see that the CAD and the AUD have reached a level of support and should outperform other currencies except for the USD and the CNY. 

Disclaimer: The content above is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice. Nothing contained here constitutes a solicitation, recommendation, endorsement, or offer by us or any third party service provider to buy or sell any securities or other financial instruments in this or inᅠin any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. As theᅠcontent is information of a general nature, it does not address the circumstances of any particular individual or entity and does not constitute a comprehensive or complete statement of the matters discussed. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information here before making any decisions based on such information.

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