Chris Iggo, chief investment officer, core investments at AXA IM, said that the key influences on investor behaviour and market sentiment in 2022 — the war in Ukraine and the aggressive tightening of monetary policy — will still be major themes in 2023.
“With hindsight, there was a collective under-appreciation of the negative impact of Russia’s invasion of Ukraine on the global economy and financial markets. War is bad news and this one came when the global economy was still recovering from the pandemic,” Mr Iggo said.
“Russian President Vladimir Putin’s actions generated huge political and economic uncertainties: how, when and if the conflict would end or escalate; the impact on the global energy market and consequently growth and inflation; and potentially changing geopolitical alignments.
“Some of these uncertainties remain and pose another threat to markets in 2023.”
However, he said markets have moved beyond the “initial shock of the war” and monetary policy tightening is largely in the rear-view mirror.
“Indeed, a failing Russian operation and a definitive end to interest rate hikes as inflation falls away could push the investor sentiment ‘swingometer’ further towards optimism,” Mr Iggo said.
He added that while a global growth slowdown isn’t a surprise, equity and credit markets will still suffer if weaker macro trends start to be reflected in corporate earnings and balance sheet weakness in the next few months.
“Now, however, markets are robust, with the US seeing a very strong start to the year in terms of corporate bond issuance. Investors don’t seem overly concerned about credit. I have said for some time that fixed income is much more attractive now we have higher yields, and high-quality credit should provide interesting risk-adjusted returns,” Mr Iggo said.
“Of course, the rally in markets [has] been significant and yields are off their highs. Using the US Treasury 10-year yield as the global benchmark, the 3.5 to 4 per cent range looks set to be in place for a while, potentially providing short-term trading opportunities but also allowing higher yielding credit to deliver decent returns to bond investors.”
Impact of China
With China re-opening after three years of COVID-19-related closures, Mr Iggo said the impact on the domestic and global economy could be “significant”, but it could be more complicated than it may seem.
“In the short term, the rapid spread of COVID-19 is likely to be a negative for activity as cases and deaths rise. The experience from other countries is that once the disease has passed through the population, and especially if vaccination levels can become more effective, the economic activity will rise strongly,” he said.
“This should be seen on numerous levels — higher consumption and private sector investment, increased volumes of foreign trade and travel, and a potential recovery in China’s property market. This Sino-recovery might also be an additional source of global inflation at some point.”
China also brings geopolitical risks with it, Mr Iggo added, particularly in the tech sector where the nation’s ambitions over Taiwan pose ongoing uncertainty.
“Any intensification of political tensions in East Asia could cause problems for the global technology sector, already hit by a post-pandemic decline in demand,” he said.
“This is likely to be a recurring theme in 2023. Even if the case for investing in tech remains strong from a long-term point of view and tech companies became a lot cheaper in 2022, the sector is likely to remain a source of volatility in equity markets as big players seek to secure more robust supply chains.”
As the year progresses, other themes will emerge, including larger geopolitical themes, but Mr Iggo said the question for investors is “whether to hold back investing cash until there is another (probably inevitable) set-back or take the view that there is more upside to come as the balance between inflation and growth improves”.
“While individual events won’t fully dictate what happens to asset prices, there are several events that can impact market sentiment — Q4 corporate earnings to be released in the coming weeks; the impact of Chinese New Year on the progression of COVID-19 and the subsequent opening of the Chinese economy; and whether Putin’s call for a ceasefire in Ukraine is the beginning of the end of the conflict,” he said.
“To borrow a footballing term, you can only invest in what’s in front of you, so assessing value, risk and whether the expected returns meet one’s financial goals, is as important as it ever was.”
