“The headwinds should ease up in the second half of 2023”

Investors should remain defensive for the time being. But they also need to be ready to take advantage of opportunities during the course of 2023, as valuations become more attractive. That’s the opinion of Pierre Blanchet from Amundi Institute. A look back at 2022 and a look ahead to 2023.

1. What made 2022 different to normal?

“The main factors that made 2022 different were the shift in inflation expectations combined with extreme geopolitical events,” says Pierre Blanchet, member of the Executive Committee of Amundi Institute (the research centre at asset manager Amundi). "The reopening of the major economies following the coronavirus pandemic triggered a demand shock, while the war in Ukraine caused commodity and energy prices to shoot up. Both ultimately led to a level of inflation that we haven't seen since the 1980s."

2. How did this affect your investment choices?

"This inflation was initially categorised as "temporary", but eventually proved to be "more persistent than expected". As a result, the central banks (with the US leading the way) began to tighten monetary policy aggressively, by no longer buying back bonds and by raising key rates. Volatility in the bond segment surged, and risky assets such as equities fell against the backdrop of higher interest rates and the strong US dollar. This led to a strong underperformance by mainly growth stocks and an outperformance by commodities, with a slight correction at the end of the year due to concerns about a recession."

"We started 2022 with the US central bank rolling up its sleeves to tackle inflation, mounting geopolitical tensions and stagflation. We remained basically neutral on risks, but switched to a slightly defensive view on Europe and China towards the end of the first quarter. In the second quarter, economic distortions and growing recession concerns caused a fall in the equity and bond markets. Without totally retreating into the bunker, we became more cautious and preferred value stocks (US rather than European)," continues Pierre Blanchet.

"It became clear in the third quarter that the tightening of interest-rate policy in an environment of high inflation and a slowing economy could entail downside risks. We maintained a flexible and well-diversified approach and became even more cautious about risky assets (equities and high yield bonds). Despite the rally in the fourth quarter, we remained vigilant on risky assets and well-diversified without changing our long-term risk appetite."

3. How are you positioning yourself for 2023?

"As economic growth slows worldwide and a recession lurks, investors would do well to remain defensive for the time being. However, they should be ready to take advantage of opportunities during the course of 2023, as valuations become more attractive. The headwinds should ease up in the second half of 2023, which should signal an improvement for companies and open the door to adding riskier assets to portfolios. Although inflation is slowing, it is still necessary to remain diversified. This needs to go beyond simply investing in equities and bonds. Commodities and gold, among others, may also very well deserve a place in the portfolio."

4. Is this a good time to round out an investment portfolio with fixed-income securities?

"As yields are under pressure on both sides (slowing growth and high inflation), it is crucial to remain active in the bond portfolio. Bonds are once again offering attractive valuations, both in nominal and real terms. Bonds are back, and in particular our current preference is for high quality corporate and government bonds. After years of famine, returns have returned to what are - historically - more "normal" levels. Higher returns give investors the opportunity to move back into both government and corporate bonds, but careful selection and active management remain important for the latter."

5. Which regions now offer opportunities?

"For the time being, we prefer US equities and quality/value/dividends. However, we are looking to step up our exposure to European and Chinese equities and cyclical companies, and to capitalise on the economic recovery in the second half of 2023."

"The differences between emerging countries will increase in 2023. Countries with more favourable inflation and monetary outlooks, such as those in Latin America, look more attractive. A pivot by the US central bank should generally increase the appeal of emerging market equities later in the year. Emerging market bonds could also show up on our radar in the second half of 2023 depending on how the global economy stabilises."

6. One final tip?

"The situation can sometimes be difficult for investors, and especially for those who invested when the markets were at a high level. There is a risk of selling at the wrong time and therefore giving up all chances of a recovery. We must not forget that economic crises are a recurring phenomenon and are difficult to predict. The keywords are still steady and patient," concludes Pierre Blanchet.

The content of this article was prepared by Amundi on 15 December 2022. The views expressed in this article (and in particular the statements between quotation marks) are those of the author and not those of Keytrade Bank. This communication does not constitute investment advice or a recommendation, nor is it a financial analysis. No part of this communication may be interpreted as being information with any contractual value of any kind whatsoever. This communication is for information purposes only. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may turn out to be incorrect. Keytrade Bank cannot be held liable for any decision of any kind taken on the basis of the information included in this communication, nor for its use by third parties. Please seek more information before investing in financial instruments. This includes carefully reading the document "Overview of the key features and risks of financial instruments" in the Document Centre at keytradebank.be.