UBS Wealth Management Investments released a report titled “Outlook 2023: Out of the Fog” last week. The report noted that as the 10-year transformation period continues to advance, there are long-term investment opportunities in topics such as the “safety-first era”, sustainable investing and private equity markets.
Mark Haefele, chief investment officer at UBS Wealth Management, said: “We believe an inflection point is expected in 2023 and investors who are currently adopting risk aversion measures should plan when and how to return to the recovery theme in 2023.” .
UBS believes that the three major macroeconomic factors that the market is most concerned about – inflation, interest rates and economic growth – should usher in a tipping point in 2023.
First, US inflation data is finally showing signs of slowing down. The Personal Consumption Spending (PCE) Price Index, the Fed’s preferred inflation gauge, rose 6% in October year-over-year, the smallest increase since December 2021. The core PCE index, excluding food and energy prices, rose just 0.2% month-on-month, below the 0.3% expected by economists.
Prior to this, the seasonally adjusted consumer price index (CPI) rose 7.7% year on year in October, lower than September’s 8.3% increase; the chain grew 0.4%, unchanged from the previous month, but lower than forecast 0.6%.
UBS said that means inflation is at least starting to show signs of peaking. The market generally expects US inflation to be between 7-7.5% by the end of this year, around 6% in the first quarter of 2023, 4% mid-year, and not fall to around 3 % until the end of the year.
Second, Fed Chairman Jerome Powell made it clear at an event at the Brookings Institution that interest rates should rise 50 basis points at the next policy meeting. “The reality of a slowdown in the pace of rate hikes could come as soon as the December meeting,” he said.
As of the end of November, the Fed has raised interest rates six times in 2022. Since June, it has raised interest rates by an unprecedented 75 basis points in a row.
As for when to cut interest rates, UBS believes this could happen in the second half of 2023. On the one hand, US inflation is likely to remain elevated in June 2023, with the 4% level lower by a factor of two to the Fed’s target. On the other hand, the continued rise in inflation and the Fed’s continued interest rate hikes this year will put even greater pressure on the US economy and businesses, and the transmission of pressure will lag.
Finally, the annual growth rate of US gross domestic product (GDP) in the third quarter of 2022 was revised upwards to 2.9%, ending the contraction of the previous two quarters. Among them, the annual growth rate of consumer spending in the third quarter reached 1.7%.
UBS’s forecasts tend to be pessimistic and US GDP growth will fall from 1.9% this year to 0.2% next year, which is relatively stagnant.
The profitability of US companies will also come under pressure during the economic downturn. UBS expects average earnings growth for US companies to be -4%, for European companies to be -10% and for Asia-Pacific companies to be between 2% and 4% in 2023. Therefore, falling corporate earnings can cause some volatility in global markets. After the Fed cuts interest rates, the market could usher in an inflection point.
