The past year has been marked by negativity and spooked market sentiments. Inflation, interest rates and consumer prices soared, as the Russia-Ukraine war raged on. The markets, as well as crypto assets, saw heavy losses, while fears of an economic recession gripped investors. 

Will the same trends continue this year, or are new ones expected to emerge over the next several months? Zawya reached out to the experts to get their predictions on how 2023 may unfold.  

Economic growth will slow down 

The global economy will grow at a slower pace this year. However, this doesn’t mean that economies around the world will slip into a recession. 

According to Christian Gattiker, Head of Research at Julius Baer, the world economy could grow by merely 2% in 2023 after a solid 3.3% in 2022. 

Gattiker pointed out that a global recession is unlikely to happen yet, as many industrialised countries are still showing strong employment trends. The regional dynamics are also likely to stay “very divergent”, so this lowers the chances of a “synchronized global recession”. 

“For example, a recovery in Asia could compensate for some softening in the US on a global scale,” said Gattiker. 

Inflation, interest rates to cool off 

After hitting historic levels last year, inflation rates will finally ease in 2023, particularly in the first half of the year, and keep softening at a slower pace through the rest of the year. 

“Inflation is expected to decrease during 2023, thanks to the monetary policies put in place by several central banks… and the global economic slowdown that could take place,” said Fadi Reyad, Chief Market Analyst at MENA. 

On a global level, inflation rate should cool off from 8% in 2022 to 5% this year, according to Gattiker, adding that most of the inflation pressure should start to abate between January and June. 

“The reasons for this are that commodity prices should come down again, supply-chain bottlenecks should ease, and the demand that was pumped up after the pandemic should normalize,” Gattiker said. 

The good news is that as inflation comes down, there wouldn’t be any need to hike interest rates. And, while there are expectations of a still challenging backdrop, economies could move towards the recovery path faster. 

“It has been an unprecedented year of negativity with nearly all markets going south from stock markets to bond markets and thankfully now even the commodities markets. The latter is so important as it would be the precursor to inflation coming down, which in turn would mean we wouldn’t have such a need to increase interest rates,” said Rupert Connor, a financial planner and partner at Abacus Financial Consultants. 

“The good news is that means that we might be progressing along the circle of the recovery faster than expected,” Connor noted. 

More IPO listings in the Gulf region 

The region, particularly the UAE, saw a number of initial public offerings (IPOs) and listings last year. The trend is expected to continue in 2023, according to Connor. 

“During and since Covid, many companies quickly grew in this region. Across the UAE, businesses can greatly benefit from word of mouth and quick growth in a relatively short period of time. With this comes many brands emerging as contenders for IPO and listings, whether that be from the tech, app, [e-commerce], logistics and even fashion space,” Connor said. 

He noted that investors and venture capital firms “have a keen eye” on the Gulf region, with many businesses attracting funds. “The UAE is a hub of global activity, and this is only going to grow further as more talent and businesses emerge from the region,” Connor said. 

Besides, there are also strong incentives for businesses in the GCC to list on the stock market, according to Reyad. 

“In the UAE and Saudi Arabia in particular, IPOs were often oversubscribed, revealing strong investors’ interest in such operations. We could see new IPOs from utilities and government-owned companies, as well as listings from privately-owned firms from various sectors,” he said. 

Among those that are likely to join the IPO craze are companies in the fintech, consumer, healthcare and agriculture technology sectors, according to Vijay Valecha, CIO of Century Financial. 

A good year for equities or fixed income?  

For those who are looking for maximum yields, this year may be a good time to bet on equities over fixed income, and shift from healthcare and consumer staples to financials and technology stocks.  

“Potentially, valuations of the financials are prime for a good recovery and international technology stocks are of the same. US technology stocks might have a little more room to come down prior to recovery,” said Connor. 

“Markets may have been rocky this year, but that doesn’t mean there aren’t opportunities out there… In line with the view that inflation pressures will moderate and interest rate policy direction eases, so economic growth expectations should stabilize and recover. In all, the outlook for the relative change in expectations for inflation, rate and economic growth paint a more constructive backdrop for risk assets,” Connor added. 

Consider sustainability as well, especially since there are ongoing efforts to boost energy security and reduce reliance on fossil fuels. 

“Russia’s invasion of Ukraine has laid bare the danger of nations being reliant on fossil fuel rich states to meet their energy needs, bringing into sharp focus the need to bolster energy security. For most countries, this means accelerating the expansion of domestic renewable generation capacity. Within a traditional asset allocation framework, it may be sensible for the sustainability theme to enhance asset allocation diversification, which will be benefited from an expected continued wider-industry investment inflow into these companies,” added Connor. 

However, Valecha said that fixed income could provide good returns as well, given the ongoing fight against inflation in the US and Europe, along with the “continued turmoil in China”.  

“At the beginning of the year, it had been difficult to justify a meaningful and sizeable bond exposure given the start of the restrictive policy cycle. However, the current market condition and the rate hike lag impact points to 2023 to be a year where the markets slowdown, which bodes well for bonds with long-term exposure. Investors are likely to seek safer and defensive asset classes to protect their wealth, thus making traditional bonds, bond futures and bond ETFs highly attractive and see their prices appreciate,” Valecha said. 

Watch out for cyclical opportunities

While it’s a good idea to take advantage of attractive yields in quality areas, such as high-investment-grade bonds and quality stocks, there are cyclical opportunities to watch out for, as the markets may start to price in an economic recovery into 2024 as the year proceeds, according to Gattiker.

“While not all cyclical assets may be at a rewarding risk/return juncture yet, some of them may get there eventually. For example, we have highlighted some commodity-backed emerging market currencies, copper within commodities and selected cyclical equities,” he said.

“Our technical analysis adds opportunities in industrials overall, as well as in financials, healthcare and biotechnology.”

Don’t abandon the US dollar yet

The US dollar, which rallied strongly and reached parity to the euro last year, has been forecast to slip this year. However, it’s not a good idea to make hasty moves and abandon the greenback.

“Both fundamental and technical analyses suggest an end to one of the longest USD bull markets in history. Yet, given the uncertainties around the timing, investors may want to wait for further evidence in terms of yield differentials and currency weakness before outright positioning themselves against the USD,” said Gattiker.

(Reporting by Cleofe Maceda; editing by Mily Chakrabarty)