Digitalisation and energy security are expected to drive investor returns over the next decade, as complex geopolitical and economic headwinds continue to shape the investment landscape in 2023, according to Swiss wealth manager UBS.
However, the investment landscape should become more constructive as 2023 evolves, with investors starting to anticipate interest rate cuts and higher growth, UBS said in its global investment outlook for the year ahead.
The US Federal Reserve has raised interest rates six times this year to rein in inflation, which is at a four-decade high. Earlier this month, the central bank raised its policy rate for a fourth consecutive time by 75 basis points as it aims to bring inflation down towards its target range of 2 per cent.
Given the dominance of the US dollar as an international reserve currency and many countries pegging their currencies to the greenback, central banks globally have followed suit and raised interest rates.
“We see a year of inflections ahead and investors currently sheltering from volatility need to plan when, and how, to rotate back into recovery themes in 2023,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“Over the longer term, we see private markets as a way to grow exposure to secular trends of the decade ahead, notably in the areas of digitalisation and energy security.”
In October, the International Monetary Fund cut its global growth forecast for 2023 and warned of a cost-of-living crisis as the world’s economy continues to be affected by the war in Ukraine, broadening inflation pressures, a slowdown in China and supply chain disruptions.
While the IMF maintained its global economic estimate for 2022 at 3.2 per cent, it lowered next year’s forecast to 2.7 per cent, down 0.2 percentage points compared with an earlier forecast.
However, there is a 25 per cent probability that growth could fall below 2 per cent next year, the IMF said in its World Economic Outlook report.
Global economic uncertainty has also increased volatility in financial markets, causing them to fall into bear territory this year after a 13-year bull run.
“The decade of transformation has already brought significant changes to the global economic, political, societal and environmental picture,” UBS said in the report.
“But with central banks determined to bring inflation under control, a transition to green energy spurring investment, the era of security driving public spending on infrastructure and R&D, and the digitalisation of business models gaining momentum — all amid lower asset class valuations — a more positive secular backdrop remains possible.”
UBS’s core recommendation for investors in 2023 is to tap into defensive sectors, such as consumer staples and health care, and value stocks, which typically offer generous dividends, to offset high inflation.
Later in the year, opportunities may arise for investors to buy cyclical and growth stocks if the cost of living slows and global growth picks up, the bank said.
Investors should also seek to earn more “predictable returns from income strategies” against the uncertain economic backdrop, while high market volatility can also offer a means of generating income, UBS said.
“Evidence that inflation is falling sustainably, an end to Fed rate hikes and anticipation of potential rate cuts should present a more supportive backdrop for markets as 2023 progresses,” UBS said.
“So, while we advocate a defensive posture as we enter the new year, it is also important for investors to stay invested in line with longer-term plans and retain upside exposure so that portfolios do not get left behind as markets attempt to anticipate a turning point.”
Investors could also find shelter in safe-haven currencies in the coming months, including the US dollar and Swiss franc, UBS said.
As the world’s reserve currency, the dollar has experienced unprecedented strength in 2022, the bank added.
The US Dollar Index — a measure of the greenback against a weighted basket of major currencies — rose 16 per cent in the first 10 months of the year, putting it on course for its biggest annual gain yet.
“In the near term, we think this strength will persist,” UBS said.
“We expect broad market volatility to continue, leading investors to seek safe havens like the dollar, and the Fed remains more aggressive at raising rates than other major central banks.”
By June 2023, UBS has forecast the EUR/USD and GBP/USD to reach 0.98 and 1.13, respectively.
The outlook, however, for the pound remains negative, dragged down by political turmoil and weak economic growth that has led to questions about the UK as an investment destination, UBS said.
“After a prolonged period of instability, it is likely to take a number of years before the pound can regain more ‘normal’ valuation levels,” it added.
“By the end of 2023, we expect the pound to trade at 1.21 versus the US dollar.”
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For investors looking at the next 10 years, the prioritisation of energy, food and technological security by governments and businesses will be a key driver of major sectors and could provide investment opportunities in several areas, including smart agriculture.
The outlook for long-term sustainable investments is also strong despite a disappointing performance in 2022, UBS said.
“The past year has shown why investors need to diversify across sustainable investment themes, including value-orientated themes as well as growth themes,” it said.
Meanwhile, investors will enter 2023 with many questions about the strength and purpose of the political and financial institutions that support global markets, according to Iqbal Khan, president of UBS Global Wealth Management.
“Yet, provided the world can avoid another geopolitical, financial or epidemiological accident, we do see a more favourable backdrop for markets emerging as the year evolves,” Mr Khan said in the report.