Summary
Equities upside as risks slowly ease in 2023
We see a better 2023 for stocks as inflation and interest rate pressures ease, whilst focus shifts from valuation to earnings. Our investor polls show risk tolerance surprisingly high, focused on stocks, US, and tech. We see a gradual U-shaped recovery and look to prepare for next cycle with more offense. More real estate and tech. Less defensive Value and high dividends. But proceed carefully with risks still high and an outlook for lower returns in the next bull market.
Positive momentum continued
Markets up in Thanksgiving-shortened week. S&P 500 at key technical level after 12% rebound. Dovish Fed minutes and less-bad EU data offset record surge in China covid cases. US 10-yr bond yields fell and dollar neared a 3-month low. HP latest to announce more tech layoffs. MSFT takeover of ATVI facing regulatory hurdles. AAPL supplier Foxconn seeing covid disruption. See video updates, twitter @laidler_ben.
Economic slowdown is not equal
Latest GDP forecasts show Asia and emerging markets opportunity. But also risks in Europe. Energy prices are the wild-card, both for inflation and the ever key consumer outlook.
A white-collar recession unlikely
A white-collar led recession is unlikely, despite layoffs from AMZN to TWTR. Tech employs few, is still hiring, and layoffs have own drivers. Only 3% US workforce but 40% of S&P 500.
A coming ‘winter of discontent’
UK leads a global ‘winter of discontent’ of strikes. But is nothing like the 1970’s, with changed jobs markets, price expectations well anchored, and rising unemployment still to come.
The lack of crypto contagion
FTX collapse’s lack of broader impact as crypto depressed, small, and uncorrelated.
Crypto stability as FTX fallout continues
Crypto prices relatively resilient to the ongoing FTX bankruptcy fallout, with BTC at $16,000, and Binance announcing a $1 billion recovery fund. LTC soared, whilst SOL stabilised after bearing the brunt of recent sell-off. Asset class regulation calls surged, from global securities regulator association IOSCO to US Congress.
Oil leads commodities weakness
Commodity prices fell as oil market and China covid outbreak concerns outweighed the falling US dollar. G7 price cap uncertainty helped push Brent crude down to $85/bbl. Europe natgas prices rose after recent 60% slump, pulling up carbon credits. EU energy windfall taxes gained traction in Germany and Spain.
The week ahead: focus on inflation pressures
1) Consumer resilience test of Cyber Monday sales and Black Friday’s results. 2) US jobs report (Fri) to show further slowdown, to 200k. 3) EU inflation may fall from a 10.6% peak. 4) Q3 tech results from CRM, HPE, CRWD, MRVL, INTU. 5) Seasonally strong December starts.
Our key views: A gradual U-shaped recovery
Fed risks a policy mistake, with a high-for-longer interest rate outlook even as forward inflation and the growth outlook falls. Lower reported inflation is a relief. Recovery to be gradual and U shaped. Focus on cheap and defensive assets for now, like healthcare, and styles like dividend yield, and related markets like UK.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 2.39% | 7.22% | -5.48% |
| SPX500 | 3.02% | 5.75% | -15.53% |
| NASDAQ | 0.73% | 4.02% | -28.24% |
| UK100 | 1.37% | 6.23% | 1.38% |
| GER30 | 0.76% | 9.80% | -8.46% |
| JPN225 | 1.37% | 4.35% | -1.77% |
| HKG50 | -2.33% | 18.24% | -24.89% |
*Data accurate as of 28/11/2022
Market Views
Positive momentum continued
- Positive markets In a Thanksgiving-shortened trading week. The S&P 500 neared key technical levels after its 12% rebound from lows. Dovish Fed meeting minutes and less-bad European economic data supported the positive outlook, offsetting a record surge in China covid cases. US 10-yr bond yields fell and dollar neared 3-month low. HP latest to announce more sector layoffs. MSFT takeover of ATVI facing regulatory hurdles. AAPL supplier Foxconn seeing covid disruption.
The economic slowdown is not equal
- We are positive about the 2023 market outlook, but recognise risks are high. We see lower inflation and an end to rate hikes giving some needed valuation relief. Just as weaker GDP growth eats into earnings more dramatically.
- Latest GDP forecasts (see chart) highlight the Asia and emerging markets opportunity, especially if dollar peaked. But also risks in attractively valued Europe that threaten its fiscal and FX buffers. Energy prices are the wild-card, both for inflation and the ever key consumer outlook.
A white-collar recession unlikely
- High profile tech sector layoffs, from Amazon (AMZN) to Twitter (TWTR), have surged to 135,000 globally at 850 companies. Investors are worried about a looming white-collar led recession. This is unlikely. The sector employs too few, is still hiring overall, and the layoffs have their own idiosyncratic sector-specific drivers.
- Tech seeing double whammy of normalizing post pandemic growth, and lower valuations. ‘Tech’ is over a third of the S&P 500 index but only 3% of the US labour force in another stark reminder that stock markets are not economies.
A coming ‘winter of discontent’
- UK faces a ‘winter of discontent’. Forecasts for biggest fall in living standards since records began. Is driving spike in strikes. Postal, rail, telecom workers struck. The UK is leading but the trend is global. US strike action is rising. The latest from rail workers, controlling 40% of freight capacity. French air, energy, utility workers lead a European pick up.
- Wage pressures are a reality for businesses but disruption fraction of 1970’s. Labour markets have changed, price expectations are well anchored, and rising unemployment is still to come.
The lack of crypto contagion
- Bitcoin has hit new lows for this ‘crypto winter’. The FTX bankruptcy is just the latest in a string of self inflicted damage. Uncertainty is high and may continue. But a surprise has been a lack of broader impact. Crypto investment ‘tourists’ are long gone, the asset class very small, and correlations are low.
- Crypto prices have eased back but not collapsed. Correlations with other asset classes plunged. More broadly, retail ownership, institutional investor adoption, and measures of blockchain utility have been resilient to this year’s big sell-off.
The GDP slowdown (2023 – 2022 GDP Growth, pp)
Crypto relative stability continues
- Crypto asset prices remained relatively resilient to continued fallout from the FTX bankruptcy, with BTC price holding around $16,000. Impacts continued from Genesis to Grayscale whilst Binance announced a $1 billion recovery fund.
- Litecoin (LTC) bucked the asset class weakness, soaring after a step up in ‘whale’ buying interest. Whilst Solana (SOL) stabilised after bearing the brunt of the FTX contagion price weakness.
- Calls for increased crypto sector regulation rose across the board, ranging from the global securities regulators association IOSCO to the US Congress in the aftermath of the FTX bankruptcy.
Oil prices lead commodities weakness
- Commodity prices eased as oil market and China covid outbreak concerns outweighed US dollar approaching a 3-month low. EU natgas prices bucked downtrend, also raising carbon permits.
- Brent oil prices slumped to $85/bbl. China’s record new covid cases saw 20% of the economy under some form of new restrictions, raising oil demand risks. Whilst the outlook for a higher than-expected G7 oil price cap introduction on Dec. 5th could see less Russia oil disruption.
- Windfall taxes on the energy industry continued to spread, with Germany proposing a 33% tax across the sector, whilst Spain’s 1.2% tax on utilities sales passed its first test in parliament.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 0.78% | 1.07% | -29.11% |
| Healthcare | 1.77% | 4.93% | -6.83% |
| C Cyclicals | 1.52% | -2.48% | -30.47% |
| Small Caps | 1.05% | 4.07% | -16.75% |
| Value | 1.91% | 7.59% | -5.61% |
| Bitcoin | -0.46% | -18.54% | -65.16% |
| Ethereum | -0.66% | -19.73% | -67.91% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: important macro data week
- Consumer resilience in focus as the Cyber Monday sales follow Black Friday’. US markets reopen after 1.5 day Thanksgiving holiday.
- US employment report (Fri) set for a further non-farm payrolls slowdown to 200,000, with unemployment rate inching up to 3.8% and monthly wage growth easing to 0.3%.
- EU inflation (Wed) may fall to 10.4% from 10.6% peak, helped by lower natgas prices. Ahead of possible ECB rate hike slowdown.
- Tech focused Q3 results from CRM, HPE, CRWD, MRVL, and INTU with recent focus on ‘white-collar’ recession pick up in sector layoffs.
- November month-end (Wed) with December strong seasonality and big Fed meet on 14th.
Our key views: A gradual U-shaped recovery
- Fed risks a policy mistake, with a high-for-longer interest rate outlook even as forward inflation and GDP growth outlook falls. Market bottomed but recovery to be U-shaped. Gradually lower inflation will be a bumpy ride but will eventually start to de-risk markets and allow risk assets, from equities to crypto sustainably recover.
- Focus on core cheap and defensive assets to be invested in this ‘new’ world, of higher inflation and lower growth, and to manage still high risks. Sectors, like healthcare, defensive styles like div. yield, and related UK to Japan markets.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -0.18% | 1.47% | 15.88% |
| Brent Oil | -4.44% | -10.96% | 7.57% |
| Gold Spot | 0.17% | 6.47% | -4.12% |
| DXY USD | -0.81% | -4.23% | 10.52% |
| EUR/USD | 0.72% | 4.36% | -8.56% |
| US 10Yr Yld | -13.92% | -32.86% | 217.42% |
| VIX Vol. | -14.33% | -25.16% | 19.05% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: a better year for stocks?
A better year as macro pressures ease, and focus shifts from valuation to earnings
We see lesser macro pressures next year heralding a better year for equities and a gradual portfolio re risking. Inflation is the major concern, but price rises are set to fall. Central banks to stop hiking interest rates. But economic growth will fall back more. Equity markets may look ahead to year-end rate cuts kicking off a new bull market. But the next upcycle will see lower than usual returns, with valuations full and earnings high. Risks will stay high, and investors should proceed cautiously especially in the 1H23.
Our latest investor polls show risk tolerance high, focused on stocks, US, and tech
Stocks are the favourite asset class in our year-ahead poll, with many also not given up on crypto. It’s the second most favoured asset class, ahead of commodities, bonds, and currencies. The US is the favoured market, though less so than 2022 (see chart). The contrarian focus continues, with China the 2nd focus, ahead of Europe and UK. Japan remains the world’s ‘forgotten’ market. Emerging Markets are also deeply out of favour despite the positive China view and outlook for a weaker dollar. Tech remains by far the favoured sector, with twice as many preferences versus energy, the 2022 performance winner.
Set for a better year in 2023, with a gradual U-shaped recovery
Our outlook is for lower inflation that allows eventual interest rate cuts calls for slowly adding to equity allocations, with lows already seen. But 2023 may be the opposite of this year. With valuations seeing relief and earnings under increased pressure. Overseas markets are already much cheaper than the US, with more depressed earnings, and widening GDP growth divergence to a firming Asia to weakening Europe.
Preparing for the next cycle, with more offense and less defence as year progresses
We look to gradually add portfolio risk as inflation falls and we near year-end rate cuts. This will put a second-half focus on interest rate sensitives, from real estate to financials. Also hard-pressed Growth segments, like technology. This will be a change from the 2022 and first half-2023 focus on a Value and Dividend defensive ‘crouch’ with risks still high. 2022’s record-breaking sector performance gap will narrow.
Managing uncomfortably high risks and the outlook for lower returns in the next bull market
Returns will be lower in the next cycle. US valuations are already at averages. Whilst earnings not fallen and profit margins full. Risks remain uncomfortably high. Sticky inflation could delay rate cuts and drive a deep recession. Debt at records and a constraint on more fiscal help. Investors should proceed with caution.
Etoro investor survey: Favoured 2023 stock market
Key Views
| The eToro Market Strategy View | |
| Global Overview | The aggressive Fed interest rate hiking cycle and stubborn inflation has boosted uncertainty, recession risk, and hit markets hard. We see this gradually fading, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the market rout, and now below average levels, and are supported high company profitability and near peaked bond yields. Fast Fed hiking cycle boosted recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by defensive growth. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. Broader EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields risen. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by rising Fed interest rates and ‘safer-haven’ bid. Many DM currencies hurt by still low interest rates and struggling growth. ‘Reverse FX war’ interventions ineffective. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. Stabler USD outlook as near top of Fed cycle. |
| Fixed Income | US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity. |
| Commodities | Strong USD and rising recession fears hitting commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil by slow return of OPEC+ supply and Russia 10% world supply problems. |
| Crypto | In the latest ‘crypto winter’ (16th crash for bitcoin) with dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size under $1 trillion, correlations low, regulation growing, development/catalysts continuing – Ethereum merge to proof-of-stake and coming BTC halving. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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