Financial markets in 2023: Banca Generali’s Outlook

No one obviously has a crystal ball to predict this exactly. That said, however, there is one aspect that seems hard to dispute: after several years of rates at yields close to zero and in many cases even negative, in 2023 the outlook seems much more favourable for bond investments than in the past.

This is the view of Mario Beccaria, head of Banca Generali's Asset Management, who says: "This view is a consequence of the Central Banks' approach, which is expected to be less aggressive in 2023 and tends to end the cycle of rate hikes". Over the coming weeks, Beccaria emphasises, inflation figures in both the US and the Old Continent will have to be monitored with particular attention. While in America the inflationary peak already seems to be behind us, Europe has not yet seen a stabilisation of the price level. According to the head of Banca Generali's Asset Management, a slowdown in inflation could lead central banks to take a break in the restrictive monetary policy implemented during 2022 (during which there were several interest rate hikes).

 

"Given the volatility in rates and geopolitical uncertainty" Beccaria adds, "in the bond asset class we favour Investment Grade issues (i.e. rated above triple B) over High Yield issues (i.e. rated below triple B). In any case, the latter have very attractive yields between about 7 and 8%, with high coupons that at current levels could provide a good entry point for investors. Most European issuers have in fact already locked in their financing for the years to come."

But the real 'news' for the bond sector is that, after many years, there are investment opportunities in Eurozone government bonds. The issues of European states have in fact returned to positive yields "and could be very useful for protecting capital during the volatility phases that may occur in 2023" says the head of Banca Generali's Asset Management.

For Beccaria, the decline in US inflation is the most encouraging sign for the new year. On the equity segment, however, several variables will have to be evaluated, such as the evolution of the conflict in Ukraine or the Covid containment policy in China, which have a direct impact on global supply chains.

In light of these considerations, a possible downward revision of earnings estimates for listed companies in 2023 will also have to be taken into account. Indeed, even with analysts continually downgrading earnings estimates, the economic slowdown expected in the first part of next year may not already be fully priced in by the market.  "With this in mind", Beccaria continues, "the possible retracement phases of the main equity indices could therefore represent accumulation opportunities in the equity asset class."

After several years characterised by a strong rally in 'growth' equities followed by a recovery in the 'value' segment, for the coming months the head of Asset Management believes it is advisable to adopt a strategy that involves a combined approach of the two styles.

The euro-dollar exchange rate has been strongly impacted over the course of the year by the more restrictive monetary policy implemented by the Federal Reserve compared to the Bce. The view of the head of Banca Generali's Asset Management is that "the strong rise in the US dollar that took place until September seems to have come to an end, with possible further recoveries for the euro in the coming months".

With regard to commodities, on the other hand, Beccaria believes that the current phase of price cooling may continue, as a result of the expected slowdown in the global economic cycle.

Therefore, in light of the considerations made, the suggestion to be given to investors is a balanced asset management with a well-diversified exposure to the bond market that is in any case higher than in the past. "In the last 94 years", Beccaria recalls, "only four times have both the stock and bond markets recorded negative performances, and only in 2022 with double-digit losses". Which testifies to the fact that there is currently no shortage of opportunities in both asset classes: bond and equity. This is therefore a good reason to significantly reduce the cash reserves that many savers have accumulated over the past year.