LGT Beacon: Investment perspectives February 2023

Investment actions: 

• We view the recent optimism as overdone and use the rally to reduce equities in favor of cash 
• Recent developments around China reaffirm our preference for accessing that space selectively via private markets  

Financial markets remained buoyant over the past month, with equities and interest rates rising, and the US dollar strengthening again against most peers. Energy prices continued to fall, while most industrial metal prices trended lower as well. 
Backing this global trend was China, where stocks shed about a quarter of the gains they had registered during their strong reopening rebound over the previous three months. In fact, European and Japanese equities began to show relative strength in recent weeks, along with cyclical sectors as well as private equity-related strategies and small caps. Europe benefited from the reopening of China, which should support its exports, while Japanese stocks were supported by a weaker yen.  

Bonds were sold off, in particular at the longer end, leading to an upward shift of as much as 50 basis points of the US yield curve – with slightly reduced inversion. These developments reflect that many investors now anticipate the US and even Europe to avoid a recession this year, helped by diverse factors such as China’s sudden reopening in January. They also expect the Federal Reserve to stop raising interest rates later this year. 

Indeed, the International Monetary Fund’s (IMF) January Update of its 2023 World Economic Outlook confirmed these improved expectations by upgrading its forecasts for this year. The IMF now projects the global economy to grow 2.9% in 2023 and then accelerate to 3.1% in 2024. 

The 2023 forecast is below the historical average of 3.8%, but 0.2 percentage point higher than the IMF projected in October. While rising interest rates and the war in Ukraine continue to weigh on economic activity, China’s recent reopening has paved the way for a faster-than-expected recovery, the IMF said. Global inflation, meanhwile, is expected to fall to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic levels. In the developed economies, inflation is expected to fall from 7.3% in 2022 to 4.6% this year and 2.6% next year. 

This brightening up of expectations also became visible in the consensus forecasts for 2023. On average, economists now expect the eurozone to narrowly avoid a recession this year, while growth in the US, China, and Japan is expected to increase at a higher level. Among large economies, only the UK is expected to remain in a relatively deep recession. 

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