How to face 2023?

The context at the beginning of the year is favourable for the markets, both equities and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy.

We face a Goldilocks-type outlook

At the beginning of the year, it is always tempting to extrapolate recent trends. Experience shows, however, that infra-annual developments are rarely linear. It is thus likely that economists will revise their inflation forecasts downwards and that the statistics for the coming months, fuelled by the Chinese recovery, will be more disappointing.

Beyond the short term, there are nonetheless some positives

Firstly, let’s note that despite all the shocks it has suffered, the global economy has held up well in 2022. There was no severe recession. Why? First, the quality of corporate balance sheets (resilience of profits) and banks has been a very resilient vector for business spending on recruitment and investment. As a result, global employment has generally continued to grow. In some cases, government support measures have been substantial, notably in the euro area and China. Finally, consumption of goods seems to have responded to the easing of commodity price inflation (since last summer) as well as goods price decreases thanks to the considerable improvement in global supply chains.

2023 should be quieter than 2022

Secondly, it should be added that the year will be less fraught with negative shocks than 2022: geopolitics, inflation, monetary tightening, health difficulties in China.

From this point of view, 2022 was obviously an exceptional year. In terms of the markets themselves, it was marked above all by a decline in both the equity and bond markets. This situation has only occurred 13 times in the United States in the last 150 years. We should also remember the high volatility of the markets (in interest rates more than in equities), the collapse of cryptoassets and, on the other hand, the return to favour of money market instruments, risk-free products (contracts in euros), the performance of commodities and the major safe-haven assets of the US dollar, the Swiss franc and gold (in euros).

It must be said that the context was itself exceptional. A double stagflationary supply shock (post-Covid supply chain disruptions and the war in Ukraine) which resulted in a surge in commodity prices not seen for 50 years and a monetary tightening the intensity of which was also unprecedented for 40 years. Behind all this is of course the geopolitical situation. We have witnessed the deepest war on European soil since 1945 with the most serious nuclear threat since 1962, following an initiative taken by the 3rd military power, a major nuclear power and a permanent member of the Security Council.

At the same time, China’s health difficulties, fuelled by the continuation of the zero-covid strategy, have weighed heavily on global growth, as mentioned above.

This is largely behind us.

outlook

What is the outlook for the US equity market in these conditions? A somewhat excessive absolute valuation, a fairly comfortable risk premium, moderate positioning, fairly neutral market sentiment and probably still somewhat negative EPS revision momentum. In short, nothing too exciting. But more than the directional trend, 2023 should be marked by a new attractiveness of previously losing strategies: US and Chinese tech, European small caps, Chinese plays, emerging debt, …

The most important indicators to watch will obviously be employment and inflation figures, central bank speeches and data on the recovery in China. And of course, we must not neglect events related to the conflict in Ukraine.