What Major Financial Institutions Expect For 2023 – Fund Management/ REITs

Global Outlook

A new regime of sustained inflation and transition
to sustainability.

The global economy is entering a new regime. As summed up by
Blackrock, three long-term variables are playing out: aging
populations, geopolitical fragmentation, and the transition to a
lower-carbon world. 2023 could be the pivotal year ushering in this
new regime.

• The consensus places the world on a downward
  trend and is unanimous with regards to the occurrence of
  recession in Europe in the first half of 2023. This would be soft,
  with an average estimate of GDP decline of -0.1%. The U.S. may show
  more resiliency, with a GDP growth of 0.4% thanks to its energy
  advantage, and face or avoid a mild recession.




• The broad sentiment is however very negative, as over 75% of
  fund managers think a recession is likely over the next 12 months
  – a level roughly on par with peak pessimism during the
  global financial crisis in 2009 and the COVID-19 pandemic in
  2020.




• The greatest uncertainty remains the extent of the
  Asian rebound, especially the Chinese transition from a
  “capital spending to one of consumption-led,”
  noted Bank of America or Morgan Stanley.




• The extent of this transition may determine an increase
  in commodity prices and an appreciation of Asian
  currencies, explain Lazard and Citi. This would “make it
  difficult for the Fed and other central banks to back off too
  quickly,” completes UBS.




• The Ukrainian war and the potential escalation
  of the geopolitical conflict, creating further
  disruptions in the energy and food sectors, is the
  principal risk.

Inflation – Sustained and unlikely to
reach pre-pandemic levels.

• There is consensus affirming that inflation will cool
  globally over the year. However, the Central Bank’s
  targets are not expected to be reached, as inflation is forecasted
  to be around 4-5% in the U.S. and 6-7% in Europe.




• According to some institutions, the peak may be reached in
  Europe in early 2023. Blackrock insists that the world is entering
  a new regime: “living with inflation.”

Labor market – Resilient and unlikely to
fal.

• The labor market is unanimously perceived as currently
  strong, due to its status as the main component of the
  global economy’s resilience. Markets will be paying close
  attention to it, as disruptions in employment could signal a rapid
  deterioration in the global economy.




• Blackrock focused on the aging workforce, which creates
  a major transformation challenge for consistent economic
  growth. Labor shortages contribute to the resilience that
  financial institutions attribute to the labor market.

Equity vs. debt market – Portfolio
rebalancing for risk reduction.

Equities – Experiencing lower valuations
due to a higher risk-free rate.

• Most institutions predict a tough year for global
  equities. U.S. quality stocks are considered more
  resilient than in other regions. There will be a continued
  rebalancing of portfolios in favor of private equity, after an
  already hard period for equities.




• Specifically, on valuation, Lazard explains that the ongoing
  increase in risk-free rates will naturally imply a higher discount
  rate.

Debt – Net inflows to bonds and corporate
debt.

• Overall, economists see a strong trend towards bonds in
  2023, to provide a minimum hedge against riskier equities than in
  recent years.




• With respect to bonds, institutions show divergent views. Many
  institutions, such as Lazard, Wells Fargo or HSBC, see
  opportunities in short-term bonds, while BNY Mellon or Morgan
  Stanley see an attractive entry point in municipal bonds from
  intermediate to long maturities. In any case, overall, the trend is
  clear: bonds, including corporate bonds, will see net inflows.

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