Summary
The better 2023 outlook across asset classes
2022 was a year to forget as much asset class diversification failed, with both equities and bonds plunging. 2023 is set for big changes as inflation falls, interest rates peak, and US dollar stabilises, but the growth fall accelerates. Helps long-duration bonds and welcome relief to many currencies. Some commodities still be supported but won’t lead. Equities could start next equity bull market late in 2023 as prepare for rate cuts. Crypto a forgotten upside wild-card.
Diverging consumer drives markets
S&P500 eased after big 10% rebound, with dollar and bond yields up. US producer prices added to peaked inflation hopes, even as Fed downplayed ‘pivot’. China rose on property support and Xi Biden meet. Consumer focus with weak TGT and KSS results but better WMT and M. Hard-hit semis helped by Buffett TSMC buy and NVDA Q3. Luxury consolidated on EL buy of Tom Ford. See video updates, twitter @laidler_ben.
Navigating the coming data drought
Markets face a data drought, to healthily cool heels after 10% rally. Before triple-whammy in penultimate full trading week of year, with US inflation, FOMC, ECB, options expiry.
Global trade pressures, and silver linings
Global trade volumes pressured, from +9% last year to only +1% next. Hurting MAERSKB.CO to FDX. But with silver lining of tourism driven services recovery. @GlobalLogisitics.
Oil price could upset the party
Risk of renewed oil price spike over $100 derails some of lower inflation optimism as near Dec. 5th EU and G7 restrictions on Russian oil.
The football World Cup and your portfolio
It may impact your portfolio in five ways, from consumer stocks, (KO to NKE), to distorting seasonality, with GCC market focus.
Crypto resilience after FTX
The fallout from the FTX bankruptcy continued with small exchange Genesis halting client withdrawals. BTC resilient and held at $16,000, helped by both El Salvador and TRON founder support. Weakness led by SOL, MATIC, AVAX. BIS published 90 country bitcoin ownership study showing its younger and male focus.
Commodities pull back
Eased back on stronger dollar and recession-fear driven Brent oil weakness. Ag segment fell as coffee slumped on combo of good Brazil supply and demand fears, whilst wheat pressured by Black Sea export deal renewal. UK extended its energy windfall taxes. SQM profits soared ten fold on 200% YoY lithium price rise.
The week ahead: the data drought starts
1) Global flash PMI GDP health check. Last a recessionary 49. 2) FOMC meeting minutes as look to a Dec. 14th 0.5% hike slowdown. 3) US Thanksgiving holiday and ‘Black Friday’ sales. 4) Late Q3 results flurry from DE, ZM, ADI, A, DLTR. 5) 32 nation soccer World Cup 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 | -0.01% | 8.57% | -7.13% |
| SPX500 | -0.69% | 5.66% | -16.80% |
| NASDAQ | -1.57% | 2.64% | -28.76% |
| UK100 | 0.92% | 5.97% | 0.01% |
| GER30 | 1.46% | 13.36% | -9.15% |
| JPN225 | -1.29% | 3.75% | -3.10% |
| HKG50 | 3.85% | 10.99% | -23.10% |
*Data accurate as of 21/11/2022
Market Views
Diverging consumer drives markets
- Equities eased after recent strength. US dollar firmed and 2-year bond yields rising. Lower US producer prices added to peaked inflation hopes, even as Fed speakers downplayed early ‘pivot’ hopes. China helped by property sector support and Xi-Biden meeting. Changing US consumer in focus with weak TGT and KSS results vs WMT and M strength. Hard-hit semiconductors helped by Buffett TSMC stake and less-bad NVDA results. Luxury consolidated further with EL buying Tom Ford.
Navigating the coming data drought
- Lower US inflation and China’s better outlook adds to support from less-bad Q3 earnings below average valuations, strong year-end seasonality, and depressed investor sentiment.
- Yet markets now face a data drought, to cool their heels. Before triple-whammy in penultimate full trading week of year. December 13-15 see’ US November inflation, the FOMC meeting and ‘dot plot’ projections, and the next ECB meeting. Plus the 16th’s ‘quadruple witching’, one of highest volume trading days of year.
Global trade pressures, and silver linings
- Global trade volumes are pressured. Economic growth is slowing, demand rebalancing from goods to services, and trade barriers rising. This offsets untangling supply chains. The WTO see’s global trade volumes slowing to 3.5% this year, from 9.1% last, and has slashed 2023’s outlook to 1%. This slowdown may now be coming early.
- Maersk (MAERSKB.CO) see’s ‘dark clouds on the horizon’. FedEx (FDX) a ‘worldwide recession’. Open goods-focused markets like Germany, would suffer vs ‘closed’ or services-led from US and China to Spain and Italy.
Oil price could upset the party
- The US inflation decline has turbo-charged markets in hope that it continues and allows Fed to halt its dramatic rate hiking cycle in Q1. This is our base case. But there is a risk a renewed oil price spike over $100 derails some of this inflation optimism.
- Oil supply is tight and demand not easing as much as hoped. We’re nearing the December 5th double barrelled EU and G7 crackdown on Russian sales. This could see 2.0-3.0mbpd (2-3% world supply) of disruption to already very tight oil markets. By comparison an average economic recession see’s a 1.6% demand cut. @OilWorldWide.
The football World Cup and your portfolio
- 4-yearly World Cup started. Up to half the world’s population will watch. It’s a $30 billion industry in just Europe. It may impact your portfolio in 5 ways.
- From 1) stocks ranging from sponsors (V, KO), to apparel (NKE) and brewers (ABI). 2) Evidence match results can drive both market performance and consumer confidence. 3) Impact of the first-ever ‘winter’ World Cup’ on usually strong year-end seasonality. 4) The strong recent outperformance of Middle Eastern stock markets, and 5) Qatar’s role as world’s largest LNG exporter, bringing $55 billion of sales in the first half of 2022 alone.
Days S&P 500 index rose or fell over 1% (1980-)
Crypto resilience after FTX
- Crypto markets absorbed fall out from Chapter 11 bankruptcy of leading exchange FTX. Fellow, but smaller, exchange Genesis was forced to halt client withdrawals. Performance brunt borne by Solana (SOL), Polygon (MATIC), Avalanche (AVAX).
- Bitcoin (BTC) was less impacted, holding above the $16,000 price level. Potentially helped by announcements from President of early-adopter El Salvador and the founder of TRON (TRX) that they would each be buying a bitcoin every day.
- BIS Bitcoin ownership study in 90 countries from 2015-22 showed focus on young, male investors.
Commodities eased back
- Bloomberg commodity index eased back as the US dollar strengthened and oil fell sharply with heightened recession fears. The US 10Y-2Y bond yield curve is the most ‘inverted’ in 40-years, a traditional strong indicator of coming recession.
- Agricultural prices weakened, with arabica Coffee slumping 10% with Brazilian production up and demand being hit by rising recession fears. Wheat fell back as the Black Sea grain export deal was renewed between Russia and Ukraine.
- The UK increased its energy windfall tax from 25% to 35%, and also launched a 45% electricity generators tax. Elsewhere, world’s largest lithium producer SQM saw a 10-fold profits surge on the back of lithium’s 200% price rise in the past year.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -1.05% | 5.58% | -29.66% |
| Healthcare | 0.59% | 5.45% | -8.45% |
| C Cyclicals | -2.76% | -1.13% | -31.51% |
| Small Caps | -1.75% | 5.34% | -17.62% |
| Value | -0.23% | 8.81% | -7.37% |
| Bitcoin | -0.31% | -13.28% | -65.00% |
| Ethereum | -3.72% | -6.51% | -67.70% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Data drought starts
- Flash December PMI health-check on GDP and inflation trends in US, EU, UK, JP, AU in ongoing race between falling growth and inflation. Last global composite PMI was a recessionary 49.0.
- Minutes from last FOMC meeting to be closely scrutinised for any clues to a hoped rate hike slowdown to 0.50% pace at Dec. 14th meeting.
- US Thanksgiving holiday (Thu) ahead of ‘Black Friday’ and ‘Cyber Monday’ festive shopping kick-offs. 7% holiday season growth forecast.
- Late flurry of US Q3 results with ag giant DE, work-from-home ZM, techs ADI, ADSK, DELL, HPQ, healthcare A, and consumer DLTR, WMG.
- First week of FIFA World Cup with 32 nations competing and up to 4 billion watching.
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* | -1.78% | 3.17% | 15.76% |
| Brent Oil | -8.38% | -6.26% | 12.57% |
| Gold Spot | -1.25% | 5.38% | -4.29% |
| DXY USD | 0.64% | -4.50% | 11.46% |
| EUR/USD | -0.27% | 4.68% | -9.21% |
| US 10Yr Yld | 0.79% | -40.13% | 231.34% |
| VIX Vol. | 2.66% | -22.13% | 34.26% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Diversification to work better in 2023
2022 a year to forget as asset class diversification largely failed
There were few places to hide in 2022 with the world’s inflation and interest rate shock. Bonds had one of their worst years ever, made more painful by the concurrent sell off in equities. Alternatives like listed real estate were also hit hard. The US dollar soared, leaving near all other currencies trailing in its wake. The crypto asset ‘winter’ significantly worsened. Commodities was the sole outlier, but even here has seen near term weakness with a sharp divergence between energy and the rest. We see lower inflation and growth providing bond and currency relief in 2023, as equities await the lower interest rate catalyst.
2023 set for another change as inflation and interest rates peak and growth falls further
We see lower inflation in 2023, with investors looking ahead to eventual interest rates cuts at end of the year. This will be balanced by an accelerating economic and earnings growth slowdown. Still uncomfortably high macro risks are likely to keep investors nervous and volatility high. But this should be a better environment for a bonds and currencies comeback. Whilst higher risk assets like equities and even crypto would be the biggest winners from the start of interest rates cuts that would signal the next bull market.
Bonds and currencies to see a better year after dramatic weakness in 2022
As the economic outlook changes in 2023 we look for the asset class laggards to rebound. The haven of cash and short duration bonds is set to flip to long duration bonds (IEF and TLT) as inflation eases and recession risks mount. Similarly, a more stable US dollar (DXY), as the Fed nears peak rates and risk aversion eases, would be a pressure relief for many. The Yen (JPY) will also be helped by a less accommodative BoJ, and depressed EM currencies by an earlier return to growth. Listed real estate (XLRE) would be the major beneficiary of Fed rate cuts as the classic early cycle interest rate sensitive, outpacing the defensiveness of @Private-Equity.
Commodities, crypto, and the ingredients for the start of the next equity bull market
An accelerating demand slowdown is a big headwind for commodities but set to be balanced by a more stable dollar, a gradually reopening China (MCHI), and still limited supply additions. This is a recipe for high-for-longer prices if not asset class leadership. Crypto (BTC) has shrunk to a deeply out-of-favour and tiny asset class but is the 2023 wild card. Rate cuts and the start of a new bull market, and outlook for next bitcoin halving, could propel it to be the best asset class performer under the right circumstances. Equities could see a subdued first half, with rates high and growth slowing, but we think the lows have been seen. Nearing Fed rate cuts in the 2H would be the fundamental catalyst for the start of the next bull market.
Year-to-date price performance, by asset class (%)
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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