Private client stockbroker Brewin Dolphin is predicting a ‘brighter’ year for investors, from a macro point of view at least.
Albeit it doesn’t foresee 2023 being a year without its own challenges.
Brewin Dolphin, in a note, said it expects to see a mild recession and rising interest rates reach a peak, though inflation will ease, according to its analysts.
Looking into the New Year, here’s some of what the broker predicts.
1 - Mild recession
The fastest US rate hiking cycle in history is set to feed into a recession, Brewin reckons, though its far from alone in this prediction.
It won’t be too bad though, not according to the stockbroker.
“While a recession in major developed economies looks inevitable, the length and depth of it is likely to be mild due to a strong labour market with abundant job openings, well-capitalized financial institutions, and government measures to protect the most vulnerable from rising energy costs, it says.
“At consumer level, however, higher borrowing costs will weigh as recession works through into personal and business finances, potentially triggering a downturn in the housing market.”
2 - Inflation to ease:
Inflation was a major source of economic pain in 2022 but Brewin expects it to slow sharply in 2023.
Features will include falling commodity prices, including wholesale oil and gas.
Lower input prices will help increase inventories of goods across sectors, and, cheaper fuel should reduce supply chain and shipping costs, it added.
The broker noted that historically, interest rate increases have lagged of 12 to 18 months before impacting the real economy and inflation.
Eyes will be on key economic indicators, especially through the early months of the year.
3 - Interest rates to peak and pause
Large and rapid rate increases are likely in the rear view mirror, in the major developed economies.
In the US, the Fed Funds Rate is expected to peak at around 5% meanwhile, in Blighty, the Bank of England rate will likely peak at around 4.5%, Brewin says.
Central bankers are determined to fight inflation but also know they have already done a lot in a short time span and don't want to overtighten and crash the economy unnecessarily, it highlights.
The obvious forecast then is that interest rates will plateau close to these new high levels.
Rate cuts are more likely to be a 2024 story, subject to inflation numbers.
4 - Bonds to be more attractive than equities:
Nobody would’ve predicted this summer’s wild gilt market amid the calamitously but short-lived tenure of Liz Truss at Downing Street.
It’s yet to emerge who made how much shorting the UK’s government debt in those dicey weeks, nevertheless, it was for sure a major liquidity event for bond traders.
Quite separately, though, 2023 is seen as another year in which debt markets appear more attractive than equities, so Brewin says.
Despite economic uncertainty and market volatility in 2022, there are expected to be attractive opportunities for long-term investors in bonds after the surge in yields and spreads this year.
Investors will be able to lock in decent yields while taking little to no credit risk in selected investment grade credit, such as US Treasuries, UK Gilts, and German Bunds.
Equities, on the other hand, are expected to underperform bonds due to high valuations and declining earnings growth, the broker reckons.
5- Emerging markets to outperform developed
Emerging markets are expected to outperform developed markets in 2023.
Bottomed out low valuations are seen as good reason for EM to gain impetus especially when seen in the context of improving economic fundamentals and a better relative outlook for commodity prices.
Asian equities will outperform, according to Brewin’s wealth managers, who cite favourable exposure to the global technology and consumer sectors, and demographics.