La Française: Outlook 2023

La Française: Outlook 2023

29 november 2022

Vooruitzichten
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By François Rimeu, Senior Strategist, La Française AM

Massive fiscal and monetary stimulus in 2021 has allowed relatively moderate, though decelerating, global growth in 2022 which we expect to stand at close to 3% by year-end. However, given policy tightening this year, we fear that growth in 2023 will slow severely.

Growth forecasts have already come down significantly over the last 6 months (from 2% to -0.1% in the Eurozone and from 1.9% to 0.4% in the US; source: Consensus Bloomberg) but looking at some historically reliable leading indicators, (ZEW indicator of economic sentiment, Ifo Business Climate Index, Federal Reserve District Banks), those downwards revisions could even be considered optimistic.

Inflation is obviously very hard to forecast, especially in the current environment. What will happen to energy prices? Is China going to reopen and put an end to its Zero-Covid policy? These questions are difficult to answer and will potentially have a massive impact on inflation. Nevertheless, what we expect on the inflation front could be summarized as follows:

  • Inflation to probably come down significantly in the coming months in the US;
  • Inflation in the Eurozone to probably do the same, but with more uncertainty related to the evolution of gas prices.

Even if inflation comes down, we think it will remain too high to allow central banks to cease their tightening policies, as least in the coming months; if they do not see either inflation dropping significantly or the job market suffering hard, they will continue to tighten financial conditions (hiking rates, quantitative tightening). They might turn more dovish during the second half of the year once the growth situation has worsened.  

In this situation, we favor in our allocation for 2023 fixed income securities, especially less risky assets. We believe that both real rates and nominal rates (short end of the curve) could go down in the US in 2023. We also believe that investment grade securities could offer relatively attractive returns in 2023. We are less positive on equities because lower growth and negative wage inflation might impact earnings. We are also cautious on the riskier part of the high yield market.

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