UBS Wealth Management Investments published a report last week titled “Outlook 2023: Out of the Fog”. The report pointed out that as the 10-year transformation period continues to advance, there are long-term investment opportunities in themes such as “the era of safety first”, sustainable investment and private equity markets.
Mark Haefele, chief investment officer at UBS Wealth Management, said: “We believe that an inflection point is expected in 2023, and investors who are currently taking risk-off measures should plan when and how to return to the recovery theme in 2023.”
UBS believes that the three major macroeconomic factors that the market is most concerned regarding: inflation, interest rates and economic growth, are expected to usher in an inflection point in 2023.
First, U.S. inflation data are finally showing signs of slowing down. The personal consumption expenditures price index (PCE), the Fed’s preferred inflation gauge, rose 6% in October from a year earlier, the smallest gain since December 2021. The core PCE index, which excludes food and energy prices, rose just 0.2% month-on-month, below the 0.3% economists had expected.
Prior to this, the seasonally adjusted consumer price index (CPI) in October grew by 7.7% year-on-year, lower than September’s 8.3% increase; the chain grew by 0.4%, flat with the previous month, but lower than the forecast 0.6%.
UBS said that means that inflation is at least starting to show signs of peaking. The market generally expects that US inflation may be between 7-7.5% by the end of this year, around 6% in the first quarter of 2023, 4% in the middle of the year, and will not fall to around 3% until the end of the year.
Second, Fed Chairman Jerome Powell made it clear at an event at the Brookings Institution that interest rates are expected to rise by 50 basis points at the next policy meeting. “The reality of a slowdown in the pace of rate hikes might come as soon as the December meeting,” he said.
As of the end of November, the Fed has raised interest rates six times in 2022. Since June, it has raised interest rates by 75 basis points for four consecutive times without precedent.
As for when to cut interest rates, UBS believes that it may occur in the second half of 2023. On the one hand, US inflation is likely to remain high in June 2023, with the 4% level falling short of the Fed’s target by a factor of two. On the other hand, the continuous rise in inflation and the Fed’s continuous interest rate hikes this year will still bring greater pressure to the U.S. economy and businesses, and the transmission of the pressure will lag behind. Quarter-on-quarter negative growth.
Finally, the annual growth rate of US gross domestic product (GDP) in the third quarter of 2022 was revised upwards to 2.9%, ending the contraction in the previous two quarters. Among them, the annual growth rate of consumer spending in the third quarter reached 1.7%.
UBS’s forecast tends to be pessimistic, and the US GDP growth will drop from 1.9% this year to 0.2% next year, which is relatively stagnant.
Profitability for U.S. companies will also come under pressure amid the economic downturn. UBS predicts that in 2023, the average profit growth of US companies will be -4%, that of European companies will be -10%, and that of companies in the Asia-Pacific region will be between 2-4%. Therefore, the decline in corporate profits may cause some volatility in global markets. After the Fed cuts interest rates, the market may usher in an inflection point.
