The year of 2022 has been replete with challenges and unknowns, underscoring the indomitable nature of financial markets. Lingering impacts of COVID-19, the Russia-Ukraine conflict, scarcity of food and energy, global supply chain disruptions, and shifting geopolitical landscapes have intermingled, engendering vast uncertainty. Pervasive inflation, combined with monetary tightening by central banks worldwide, has incited substantial market volatility, catapulting investors into a whirlwind of unpredictability. As 2023 looms, it begs the question: What changes will the macroeconomic milieu undergo, and what can investors anticipate from different asset classes? We, Poseidon Global Family Office, present our 2023 Financial Forecast, aiming to shed light on these critical queries.

Summary

• Persistent inflation, surging interest rates, and diminishing economic growth forecasts present a complex scenario as we enter 2023. The specter of geopolitical tensions looms large and is unlikely to abate in the immediate future. The U.S. contends with sustained inflation, though a soft economic landing is foreseen. Europe grapples with potential recession, China's imminent openness may not bring immediate economic buoyancy, and Japan may witness a policy pivot, albeit with circumscribed impact.

• Despite China's impending openness and potential economic resurgence in 2023, it may prove insufficient to counter the global economic downtrend. Amid this backdrop, we harbor greater optimism for emerging market equities over U.S. equities. We anticipate a depreciatory trajectory for the U.S. dollar and express a predilection for Asian investment-grade bonds in the fixed income sector.
• For 2023, we advocate for a risk-balanced investment portfolio and recommend maintaining allocations in defensive assets. In light of China's opening, we perceive potential investment opportunities in sectors poised to benefit from this economic liberalization.

Navigating 2023's Uncharted Waters

The uncertainty that marked 2022 extends into 2023, with global economic growth decelerating. The economic outlook for major world economies in 2023 remains subdued. According to IMF projections, the global economic growth rate will hover around 2.7%, with developed economies experiencing a contraction from 2.4% to 1.1%, and emerging economies maintaining a steady growth around 3.7%.

For the major world economies, we offer our perspective as below for reference:

The U.S., while in an expansion phase, wrestles with intricacies such as mounting interest rates, wage inflation, a languishing real estate market, and persistent inflation. We predict the Federal Reserve's terminal interest rate will peak between 5%-5.25%. As economic growth decelerates and inflation moderates, we anticipate a cessation of rate hikes and a stabilization phase from the Federal Reserve. The repercussions of skyrocketing interest rates typically manifest after 6-9 months, affecting economic activity and consumer sentiment. Therefore, rate cuts seem improbable before the end of next year. We anticipate a soft landing for the U.S. economy.

The Eurozone and the UK are besieged by enduring inflationary pressures and food scarcity. Despite current ample natural gas reserves, the energy market sentiment for the upcoming year remains bearish. Fiscal stimulus, despite its presence, has been unable to counterbalance the impact of high inflation, which has eroded corporate profitability and consumer purchasing power, thereby hampering overall investment and consumption. Hence, the Eurozone appears to teeter on the brink of recession. With inflation likely to overshoot target rates for the better part of the upcoming year, the direction of monetary tightening in Europe is expected to remain unchanged. We hold a rather pessimistic view of Europe's economic climate for 2023.

China, having abruptly abandoned its zero-COVID policy in December and gearing up for complete openness in January, faces potential impediments to economic recovery. These include wavering market confidence, ongoing repercussions of the pandemic, high unemployment rates among youth, and real estate market-related factors. Therefore, we remain cautiously optimistic about a prompt resurgence of domestic economic growth and consumption rebound. We expect an economic uptick following the peak of the epidemic and a gradual restoration of normal market order in the second half of the year.

Japan, having implemented a misaligned monetary policy with the U.S. for the year, has had to grapple with significant pressure on its economy and the yen, with inflation rates hitting a 40-year high. The incoming governor of the Bank of Japan, expected to adopt a more hawkish stance, may usher in interest rate hikes. However, Japan's feeble domestic economy may not withstand aggressive rate hikes akin to the U.S., nor does it have the wherewithal for sustained long-term hikes. We predict a feasible range for Japan's rate hikes to be within 110-125 basis points.

Our Views on Asset Classes

While China's total opening up in 2023 will likely stimulate potential economic recovery, the global economic downturn pressure is immense, and it is unrealistic to rely on a single country's economic power to drive the global economy. In this broader context, we anticipate that the volatility of some asset classes will remain significant next year, and investors need to make adequate market observations and research. Here are our perspectives on mainstream asset classes:

Equities: From a global perspective, the investment appeal of emerging market assets outshines that of the S&P 500 index in 2023, primarily due to its projected instability. Despite repeated downgrades this year, emerging markets have fully absorbed the impact. With an increased potential for economic recovery in 2023, particularly in emerging Asian markets, these regions present compelling valuations and prospects. We are homing in on sectors and securities poised to gain directly from China's impending economic liberation.

In the context of Chinese assets, we advise an increased allocation towards offshore Chinese concept stocks, notably Hong Kong stocks. Their performance is tightly intertwined with the cyclical nature of China's economy, and following their excessive sell-off this year, they are currently undervalued and thus expected to spearhead the markets in the coming year.

Forex: The dollar index has been on a downward trajectory since the fourth quarter, having shed approximately 9% from its yearly peak. With the Fed set to halt rate hikes in the coming year, we predict the reigning strong dollar phase will come to an end in 2023. The dollar index should enter a downtrend, albeit without drastic declines. This suggests potential appreciation for other currencies, especially those of emerging markets, against the dollar.

Fixed Income: 2023 sets the stage for lower interest rates, an environment where bond prices generally move inversely to yields, creating a favorable atmosphere for premium bonds. Bolstered by decreasing rates, improved economic fundamentals, and a softening dollar, emerging market bonds, particularly those from Asia, hold a promising outlook for the upcoming year. The subdued total return on Asian investment-grade bonds in the preceding year can be largely attributed to the ripple effects of the Federal Reserve's monetary tightening. However, as we delve into our predictive analysis, a downward trend in US Treasury yields emerges. By the end of 2023, we expect the yield on the benchmark 10-year Treasury note to be hovering around 2.75%. This projected deceleration in yields is anticipated to support the total return on Asian investment-grade bonds considerably. In this context, our investment predilections veer towards the medium and short maturities within the Asian investment-grade spectrum. While high-yield bonds might appear tantalizing to the uninformed investor, it is paramount to tread with caution. The specter of corporate defaults looms large, especially within the ambit of US high-yield bonds. Hence, investors are advised to weigh these risk-reward proportions prudently while devising the overarching investment blueprint.

Risk Hedging & Defensive Posturing

The necessary macroeconomic conditions for a sustained market rally in 2023 are yet to solidify. Investors must reckon with the evolving investment landscape that 2023 presents a year defined by rapid macroeconomic shifts and intensifying uncertainty. With enduring market volatility expected, the inclusion of defensive positions within investor portfolios remains crucial.

As China opens its economic gates, consumer demand is likely to see a short-term boost. We expect sectors such as retail, durable goods, and services to benefit. Furthermore, we hold a positive outlook for tech communications, industrial manufacturing, and materials sectors - areas enjoying governmental backing - thanks to the key themes of high-end manufacturing, green economy, and technology localization. Nevertheless, we suggest investors temper the optimism. A robust Chinese economic recovery isn't likely until the second half of 2023, as the country is currently grappling with widespread infections affecting both services and manufacturing sectors to varying degrees.

On our radar for e-commerce platforms are Meituan and JD.com, both of which are primed to benefit from China's reopening. As the reopening unfolds, consumption is set to recover, making Yum China and China Resources Beer viable short-term trading options. However, we advise caution when it comes to US equities. Persistent challenges of high interest rates, dwindling corporate profitability, and macroeconomic uncertainty imply continued volatility. Defensive allocation strategies towards utilities, healthcare, and consumer staples sectors are recommended.

Investment Ideas

While market prognostications mark 2023 as a pivotal year, headwinds stemming from decelerating growth and declining inflation indicate a likely persistence of elevated interest rates by the Federal Reserve for an extended period. This presents a significant challenge for asset prices. In light of these conditions, our strategy embraces a conservative stance, advocating for defensive investment. We recommend investors concentrate their focus on defensive sectors, including staple consumer goods and healthcare. Moreover, we perceive lucrative opportunities within Asian investment-grade bonds and assets related to sectors poised to benefit from China's opening.