ABN AMRO MeesPierson: recession could turn 2023 into tricky investment year

• Following a disappointing 2022, market conditions remain challenging in 2023

• Recessionary impact on corporate earnings justifies defensive equity position

• Potential bright spots in second half: interest rate cuts and subdued economic recovery

2023 will continue to see challenging market conditions but there may be some bright spots in the second half of the year, ABN AMRO MeesPierson finds in its 2023 Investment Outlook ‘From inflation to recession’, out today. “The financial markets are shifting their focus from inflation and monetary tightening to slowing economic growth,” ABN AMRO MeesPierson’s Ralph Wessels, Chief Investment Strategist, notes. “Recession would appear unavoidable, although we believe the recessions will be different in the United States and Europe. The US economy looks headed for a mild recession, whereas the one in Europe will be deeper, as European countries are struggling with the impact of the energy crisis. And so we’re starting the new year with a defensive portfolio positioning.”

Contraction looks set to cause earnings recession

In its take on the equity markets, ABN AMRO MeesPierson points to headwinds such as slowing corporate earnings and reckons that equity investors might well face an earnings recession in the first six months of 2023.

Wessels observes: “In view of the economic contraction, corporate earnings growth is likely to be negative in the first two quarters of 2023, and such an earnings recession may well continue to depress share prices in the months ahead. This is why we’re maintaining a defensive investment strategy and are keeping our equity position underweight. Sector-wise, we also prefer defensive plays, such as health care and consumer staples. We’re underweighting consumer discretionary, industrials and communication services, as these sectors could still suffer from pockets of overvaluation. In terms of regions, we’re slightly overweighting the US relative to Europe, and are taking a neutral view of the emerging markets.”

Bright spots on the horizon

Although the short-term outlook is less than encouraging, ABN AMRO MeesPierson does see some green shoots in the longer term. Following recessions in both the US and Europe, the economic picture should start to perk up somewhat in the second half of 2023. In view of the possibility of a subdued economic recovery in the second half of the year, Wessels believes that 2023 might well be a better investment year than 2022 has proved: “The best equity returns are typically to be had right when an economy revives from a recession, so at some point in 2023 the time should be right to start rebuilding equity positions.”

Against this backdrop, monetary policies may also shift, ABN AMRO MeesPierson observes. Following a period of major interest rate hikes, the US Federal Reserve (Fed) and the European Central Bank (ECB) are likely to take a different tack as 2023 progresses. Wessels comments: “We believe that inflation will decelerate fairly quickly in 2023, enabling the Fed and the ECB to cut interest rates in the second half of the year, supporting both economies and financial markets.”

High-quality bonds more attractive

This expected pivot in Fed and ECB interest rate policies also means that investors can look forward to fresh opportunities in the bond markets, ABN AMRO MeesPierson suggests. Wessels says: “High-quality bonds – i.e. government paper and investment-grade corporate bonds – should become increasingly attractive, presenting opportunities for investors looking to lock in current yield levels. That said, we would urge caution on more risky investments, such as high-yield corporate bonds, also because of slowing economic growth.” Bonds as a total asset class are being kept at neutral by ABN AMRO MeesPierson, as is emerging markets debt (EMD).

Gas and oil prices remain high; gold prices expected to rise

ABN AMRO MeesPierson expects gas market shortages to continue for the time being and gas prices to remain high as a result. The oil markets will see the chances of shortages rise as well, which will probably be reflected in higher oil prices. Gold is likely to see upward price pressures in 2023, in part because the US dollar is expected to weaken. The bank is projecting end-of-2023 gold prices of USD 1,900 per ounce.

Gas and oil prices remain high; gold prices expected to rise

ABN AMRO MeesPierson expects gas market shortages to continue for the time being and gas prices to remain high as a result. The oil markets will see the chances of shortages rise as well, which will probably be reflected in higher oil prices. Gold is likely to see upward price pressures in 2023, in part because the US dollar is expected to weaken. The bank is projecting end-of-2023 gold prices of USD 1,900 per ounce.

Dollar likely to weaken relative to the euro as Fed cuts interest rates harder

ABN AMRO MeesPierson expects the Fed to continue to raise interest rates in the first three months of 2023. That said, the bank predicts steeper subsequent interest rate cuts by the Fed than the markets are currently pricing in. This should result in a lower dollar relative to the euro in 2023. ABN AMRO MeesPierson is pegging the EUR/USD rate at 1.08 by the end of 2023.