We continue to be cautious on the rest of the world ex-China this year and highlight our key themes ex-China recovery: we do believe that USD has peaked, and that more geopolitical tension as well as central bank buying will be good for precious metals. We also believe that some commodities, such as copper, are more exposed to a China recovery, and that commodities on the whole have suffered from under-investment in the past decade. For the first half of the year, we park most of our ex-China exposure in metals as we wait for better opportunities in the second half of the year. We have a few idiosyncratic theses scattered around the region, but we err on the side of caution as flows back to China can impact even solid companies elsewhere, particularly the outperformers from last year.
2022 was the worst year since 2008 for the Convertible Bond asset class. None of the pillars of the asset class helped. We experienced a sharp rise in interest rates to fight global inflation which marked the end of a lengthy interest rate bull market. Corporates credit spreads widened significantly, and equity markets all closed with a negative performance for the year. Even equity volatility, despite having changed regime, was not very supportive with most volatility trading between 20 and 30 level with some spike in Europe in March due to the war in Ukraine.
The ongoing conflict in Ukraine and its repercussions remain the primary theme impacting investment decisions in the region. This consists both of the factors impacting global markets, but also, more nuanced regional only influences.
2023 will be a year of unprecedented policy support.
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.
This year may be starting off well for the Chinese market, but it is not starting off well for Mr Xi. People are quietly seething at the rapid pace of reopening, both on account of the lack of psychological and medical preparedness, and also – why go to all the effort of zero-COVID for two years if herd immunity is the only solution in the end?
Our outlook for 2023 on the Japan can be summarized in 6 major trends:
In a largely uncertain global macroeconomic environment, we remain cautious for 2023 and adopt a relatively defensive stance.
Small caps are out of favour and valuations are low. Recession is ahead but business remains reasonably solid for the moment.
The link between global warming and greenhouse gas (GHG) emissions is not in dispute and the world’s public opinion has become aware of it. CO2 accounts for three quarters of GHG emissions, although the share of methane has been increasing in recent years.