It’s that time again when the minds of people in the financial world turn to the year ahead.
Outlooks for 2023 abound so to save investors some reading BofA Global Research condensed hundreds of pages of insights from their team’s 2023 forecasts into 10 key themes. Here we go.
‘Risk on’ returns by mid 2023
For the first half of the year, strategists say government bonds, particularly 30-year Treasuries, should do well as recession, earnings revisions and credit shocks hit risk assets.
However, the S&P 500 typically bottoms six months before a recession ends, which BofA sees happening in the third quarter of 2023, so expect a rebound in stocks by mid-year.
“Nibble at S&P 3600, bite at 3300, gorge at 3000,” says BofA’s investment strategist Michael Hartnett.
In the second half, inflation, the U.S. dollar and Fed “hawkishness” should have peaked, so strategists see better performance from stocks, credit, copper, industrials and small caps.
Recessions ‘all but inevitable’
Recession is almost certain for the U.S., eurozone and U.K., strategists say. BofA expects a mild recession to hit the U.S. in the first quarter though there is a risk that it will start later. Europe is expected to fall into recession this winter, followed by a shallow recovery as real incomes and probable over-tightening by the European Central Bank weigh on demand.
Expect a decline in rates by year-end
BofA expects rates to stay elevated but to decline by the close of 2023, with the two-year and 10-year U.S. Treasuries ending the year at 3.25 per cent. Sectors that were hurt by rising rates in 2022 may benefit in 2013, says rates strategist Mark Cabana.
China reopens but slowly
China and Asia economist Helen Qiao expects a gradual reopening of China with most COVID controls removed by the second half of the year, but it will be bumpy because of rising virus cases. BofA’s forecast of 5.5 per cent GDP growth for the year is well above consensus.
The first quarter of the year will be volatile but once inflation and U.S. Federal Reserve rates peak and China reopens, the outlook for emerging markets should improve, strategists say. “We forecast the highest regional local debt/FX market return for EEMEA, [Eastern Europe, Middle East and Africa] then LatAm and Asia,” said strategist David Hauner.
Industrial metals had a historically bad year in 2022, but BofA expects they’ll make a comeback in 2023, with copper rallying 20 per cent. “Recessions in key markets are a headwind but China reopening, a peaking dollar and especially an acceleration of renewables investment more than offset these negative factors,” said commodity strategist Michael Widmer.
Higher for longer oil prices
“Russian sanctions, low oil inventories, China reopening, and an OPEC that’s willing to cut production in case demand weakens keeps energy prices high,” says BofA’s Francisco Blanch. He sees Brent Crude averaging US$100 per barrel over the course of 2023 and spiking to US$110 by the second half of the year.
Capital spending comeback
The reshoring — moving production back to the United States — now underway means that manufacturing capital expenditure could exceed tech spending “for the first time in a long while,” says strategist Savita Subramanian.
The U.S.’s strong labour market, ESG, the decoupling of the States with China and deglobalization will keep certain areas of capital spending strong, even in recession, she said.
The Ukraine war and the drive towards Net Zero carbon emissions “means fossil fuels and renewables could outperform simultaneously … Small caps have historically benefitted more from U.S. capex spending than large caps,” said Subramanian.
Consumer relief — sort of
Inflation will slow but consumers will be less willing to spend because of a decline in household wealth, higher credit costs and a weaker labour market, writes BofA economist Michael Gapen, who expects U.S. unemployment to peak at 5.5 per cent in the first quarter of 2024.
Companies facing weaker growth and higher rates will shift their focus from share buybacks and capital spending to reducing debt. Strategist Yuri Seliger sees about a nine per cent total return from investment grade credit in 2023.