An uncertain 2023: market outlook survey
Endowus Insights

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An uncertain 2023: market outlook survey

Apr 2023
Mar 2023
Endowus market outlook survey of fund management companies - uncertainty, inflation, interest rates, and economic growth
  • Endowus conducted a market outlook survey with 60 fund management companies in January 2023. Among the questions asked were their expectations on inflation, growth in China and the US, as well as whether rates have peaked.
  • The survey shows a wide dispersion when it came to growth expectations, particularly for 2023. Most survey participants agreed that inflation has likely peaked.
  • All respondents who answered the question think inflation will be lower in 2024 than in 2023. The majority thinks the Fed will not cut rates in 2023 yet.

Growth expectations: a wide range

Chart: Expectations of GDP growth in the US, China, and globally. There is a wide dispersion in the forecast responses given. Source: Endowus 2023 market outlook survey of fund managers

We asked our survey participants for their expectations on gross domestic product (GDP) growth for the US, China, and global economies. Not surprisingly, the range of estimates for further into the future (2025) tended to be wider than those for 2023. 

Most of the respondents expect slowing US GDP growth after 2023, with the average (mean) forecast standing at 1.8% for growth in 2023, then slowing to 0.9% in 2024, before recovering to 1.6% in 2025.

However, there were very wide dispersions in the projections for US, China, and global growth. For example, for the US, the highest forecast in 2023 was 3.0%, while the most pessimistic was 0%; the latter forecast meant those respondents did not think the US economy would grow at all. For China’s GDP growth, the forecasts in 2023 were even more dispersed, with the most pessimistic coming in at a slight 1.9% and the most optimistic at 8%. The average GDP growth projection for China in 2023 stood at 4.2%.

As for the global economy, the average growth forecast was 2.9% — that’s more than a full percentage point higher than the average projection for the US. The higher projection for the global economy versus the US economy likely suggests that investors are more optimistic about growth outside of the US.

These projections reflect uncertainty, for which there can be many reasons. Some think that recent years have spurred a new era of economic uncertainty. In particular, economic nationalism and fragmentation along with the Covid-19 pandemic and war-related shocks have led to dynamics that we haven’t seen the likes of in the decade. According to the International Monetary Fund (IMF), the Russia-Ukraine war is a dominant force for global uncertainty. The unprecedented quantitative easing after the 2008 Global Financial Crisis (GFC) had also led many to take growth (in terms of the economy and stock prices) for granted. 

There are also other factors at play, such as the damaging effects of climate change, ongoing tension between different countries, and different factions. After the shock of the pandemic, many forecasters and experts are coming to the realisation that they still are in the dark about what they don’t know and where the next curveball will come from.

With little incentive for either Russia or Ukraine to back down in the conflict or even enter serious negotiations, it is hard to imagine greater certainty. Countries are reorganising their supply chains and energy supplies, which may lead to further volatility. Also, with China being a less predictable force and becoming more assertive in foreign politics, we may not have seen the end of its restrictive measures yet.

Aside from geopolitical volatility, many eyes remain glued on the US Federal Reserve and Fed chair Jerome Powell. Many believe that once there is more data on US inflation and US GDP growth figures, there will be more clarity on the interest rate hike path.

Watching for a US recession

US inflation figures remain high — the consumer price index (CPI) was up 0.5% in January, which was higher than expected. Powell reiterated in March that the Fed is prepared to hike interest rates higher than previously anticipated if the data requires the central bank to take such action.

In the Endowus outlook survey, GDP growth expectations for the US ranged from flat to +3% in 2023, and most respondents think growth will remain positive in 2024. However, the majority of them believe growth in 2024 will be less than half of 2023 figures, which indicates that they may expect a few quarters of negative growth. The technical definition of a recession is two consecutive quarters of negative growth.

Inflation and interest rate expectations

At the time this survey was conducted, in early January 2023, about 80% of the survey respondents believed that inflation in the US had peaked. Most survey participants also agreed that no rate cuts are likely this year. 

Pie chart: How likely is it that US inflation has peaked? Majority of responses said "likely" or "very likely". Source: Endowus 2023 market outlook survey of fund managers
Chart: When will interest rates peak? Majority of respondents (68%) said Q2 2023. About 16% said Q1 2023. Source: Endowus 2023 market outlook survey of fund managers

That said, the markets have whipsawed in Q1 2023. They rallied in January due to the more dovish messaging from the Fed, tumbled in February because of stronger-than-expected jobs data out of the US, then slid lower in March over Silicon Valley Bank concerns. 

Read more: The impact of Silicon Valley Bank's collapse on your investments

While many asset managers, as reflected in the survey, expect interest rates to peak this year, inflation can come from unexpected corners of the market. The Fed has warned of sustained levels of higher inflation. Another risk is a sustained war in the Ukraine. While the unexpectedly mild European winter and the successful energy supply diversification attempts by European governments had eased some fears, these concerns could easily return later in 2023, spooking renewed worries about inflation.

Our takeaway is that there was more optimism from the asset managers at the start of the year, but because markets move so quickly, it is hard to forecast where we would land in terms of inflation rates and interest rates.

Risky business: Fed misstep

Chart: Top 3 concerns for 2023. Central bank policy missteps, recession, inflation, and geopolitical risks were among the biggest concerns flagged by respondents. Source: Endowus 2023 market outlook survey of fund managers

Since the Global Financial Crisis, central banks around the world have massively expanded their toolkit to deal with economic disruptions. Quantitative easing on an unprecedented scale was used to provide cheap money everywhere, fuelling a decade of growth that abruptly came to an end with the pandemic and war. Most countries have not seen high inflation for a long time — the last major inflationary period in the US was in the early 1980s. 

Both new measures and the new macroeconomic climate could lead to central bank actions with unintended consequences. The Fed sent a more sanguine message in January regarding rate hikes, leading to a short market rally. However, this reversed in February after the latest US jobs and inflation data indicated that inflation was still a major concern. The latest messaging from the Fed signalled that the Fed is now back to a more hawkish stance. 

We should also consider broader policy missteps as a risk factor ahead. In some countries, political interference is an additional risk, as was seen in Turkey for example. Consider as well the chaos in the UK following the announcement of unfunded tax cuts.

China, EM stocks back in investing vogue?

Chart: Best opportunities in equities. Emerging markets and China were the top choice among respondents. Source: Endowus 2023 market outlook survey of fund managers

Key factors driving opportunities in China and EM equities

China’s reopening, which started with the surprising 180-degree turn on its zero-Covid policy in December 2022, is certainly the major driver behind higher growth expectations. Despite US-China tensions and potentially more restrictive measures that other countries have implemented (Netherlands, Australia, Japan), firms especially with China exposure in Asian emerging markets will benefit from increased trade overall. Also, with climate and demographic challenges ahead that affect policy-making in developed countries more, emerging markets may offer better growth prospects.

Some sector trends to highlight

While tensions remain over sensitive technology, consumer spending in emerging markets stays high for the time being. Financial innovation and wealth management are other areas with large growth prospects, as a rising middle class will need better banking and investment options. Infrastructure projects as well as cooperation in green tech/sustainability and digital health are also high on the list when it comes to sectors with positive potential. 

Where have US markets gone so far?

The S&P 500 index and the Nasdaq Index fell -19.4% and -33.0% in 2022 respectively, mainly due to restrictive monetary policy caused by inflation concerns. As inflation started showing signs of peaking at the end of 2022, the market’s expectation for the Fed to change its “hawkish” stance grew. This triggered a rally in the US market, particularly the Nasdaq Index which rose +10.6% in January 2023. However, recent data suggests that inflation may be stickier than expected, with the higher-than-expected January CPI and a strong jobs market. This triggered a pullback in February.

Some downside risks to note

The top concerns for investors are to do with the macroeconomic environment, inflation, recession, and central bank policy. However, many of those fears are "known" uncertainties and thus have been largely discounted by the markets. That said, unexpected shocks from rising trade and political tensions arising from the war in Ukraine and the ongoing competition between US and China can happen any time.

Fixed income: an IG story

Chart: Top 3 asset class opportunities for investors in 2023. Fixed income, equities, and real estate and infrastructure were the top choices, followed by private markets, commodities, and hedge funds. Source: Endowus 2023 market outlook survey of fund managers

Opportunities in fixed income

Chart: Best opportunities in fixed income. Investment grade (IG) bonds were the top choice, followed by government and emerging markets. Source: Endowus 2023 market outlook survey of fund managers

2022 was one of the worst years for fixed income markets in the past five decades or so. After major interest-rate increases in most countries, the pace of rate hikes has slowed. Global bonds performed in January 2023, much to the delight of investors. Most survey participants expect lower inflation going forward, which is consistent with lower interest rates and rising bond prices.

Investors take a closer look at IG bonds

In times of recessions, some of the most distressed borrowers, with higher levels of leverage (high-yield debt issuers) tend to fare the worst. Default risk may also increase. Given this investing backdrop, investors may turn more prudent to prefer lower volatility assets such as investment-grade bonds over higher-yielding (and likely more risky) instruments.

For those looking for income but are worried about investing in just one fund, consider the Endowus Income Portfolios.

Alts: Diversify?

Chart: Best opportunities in alternatives. Hedge funds, infrastructure, and real estate were the top choices among respondents. Next were private credit and commodities, followed by private equity and gold. Source: Endowus 2023 market outlook survey of fund managers

Increased economic uncertainty and the resulting higher volatility usually benefit alternative investment ideas and arbitrage-focused investment models. 

Commodities, especially the ones affected by trade tensions and the Russia-Ukraine war, may see additional supply-side disruptions, with higher prices as a result. Infrastructure, private credit, and real estate often go hand in hand, and provide opportunities particularly in emerging markets with their growing focus on sustainability and clean energy.

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