Macro forces, both political and economic, dominated financial markets in 2022, and this is likely to continue into the new year.
Gero Jung, chief economist at Mirabaud Asset Management, discusses the future of US interest rates, pockets of the market set to benefit from a weakening dollar, and why he is holding gold.
What are your expectations for the global economy in 2023?
We expect a slowdown in growth but no global recession.
Slower economic growth will continue into 2023 as the combined impact of monetary tightening, the high cost of energy and tighter financial conditions act with a lag on real economic activity.
There will be no escape from recession in both Europe and the UK, and only slight growth in the US, Canada and Switzerland.
This slowdown in economic activity will be coupled with a fall in inflation. Declining private demand and pressure on supply chains, along with base effects on energy and goods costs, will limit price increases.
There will be no escape from recession in both Europe and the UK.What are your estimates for the future of US interest rates in 2023?
The year 2022 saw inflation at its highest rate for 40 years in the developed world.
A combination of supply chain problems and strong demand driven by a significant fiscal stimulus have fuelled high prices for goods and services.
As a result, central banks have been raising their benchmark rates rapidly, resulting in more than 280 rate hikes worldwide.
It represents the fastest normalisation of monetary policies since 1981 in the US, and since the creation of the euro area.
Gold holdings are an effective hedge against further geopolitical events that are difficult to foresee.We think that the US Federal Reserve is not done with its normalisation in monetary policy, and do think that interest rates will go up further – the target for the Fed funds rate will go north of 5 per cent in early 2023.
While the lags of monetary policy are long and uncertain, we do expect tighter monetary policy to be transmitted to a more generalised slowdown in US economic activity, namely in the second half of 2023.
It is then that a future pivot by the Fed will become a possible scenario.
What are your expectations for global inflation rates?
Inflation indices will however remain at high levels in the medium term, above the 2 per cent target of central banks.
Besides cyclical factors, current inflation can also be attributed to structural influences associated with the energy transition. In such a scenario, central banks will not be able to loosen monetary policy aggressively and thus act as a counter-cyclical recession buffer, something unseen in decades.
How do you evaluate the performance of gold in 2022? And what are your expectations for the prices of the yellow metal in 2023?
We believe that gold will continue to recover its shine in times of volatility and high inflation.
While the gold price experienced some swings – gold prices increased in double digit territory at the beginning of 2022 – the overall price has been basically unchanged at year end, stabilising around its average level of slightly above $1,800 (£1,517) per troy ounce.
We will continue to be watchful for any signs of a deepening recession.Going forward, we continue to like investments in gold, as we think that the opportunity costs are benign.
In addition, given high global uncertainty, gold holdings are an effective hedge against further geopolitical events that are difficult to foresee.
How do you assess the performance of global stock markets in 2022? What are your expectations for its performance in 2023?
Regarding 2022, one telling feature is the combination of adverse factors that caused both equity and bond market prices to tumble simultaneously, thereby limiting the positive effects of diversification in a balanced portfolio.
Only selected real assets such as energy and agricultural commodities and private assets have delivered positive returns in 2022.
Investors have already widely anticipated this mild recession scenario in the developed world and should not be overly concerned: financial markets are ahead of the economic cycle and will bottom out in the quarters preceding the trough in economic activity.
Monetary policies will remain tight in 2023 despite the slowdown in growth and inflation.We will nevertheless continue to be watchful for any signs of a deepening recession and its subsequent impact on corporate earnings.
We will start the year with a positive bias in our portfolios towards US sovereign bonds, investment-grade credit and emerging market bonds, the latter being bolstered by the weakening of the dollar.
Bonds currently offer a very attractive risk/return profile given the rise in interest rates and credit spreads.
Monetary policies will remain tight in 2023 despite the slowdown in growth and inflation.
As a result, we will most likely add risk to portfolios once we have more certainty about the final level of central bank policy interest rates.
Gero Jung is chief economist at Mirabaud Asset Management
