Corporate earnings will become an increasingly important determinant of investment returns in 2023, according to Georgina Taylor, multi-asset investor at Invesco.
Taylor said that while macro factors such as US interest rates and the economic outlook for Chinese economy are two of the factors which will matter a lot, but adds that the great unknown may be corporate earnings.
Taylor said that despite economic conditions deteriorating and stock markets have fallen in 2022, company earnings released in 2022 largely reflect the performance of businesses in 2021, and so may not reflect the current reality, but she said she believes that 2023 will reveal the extent to which profitability has been hit by the events of 2022.
She said this would then enable investors to more accurately understand the valuations at which equities and bonds trade.
Taylor said: “Right now equities are just trading near their long-term average levels, and that implies they are not reflecting the potential for earnings downgrades to be significant.”
With regard to interest rates, Taylor said: “One of the things that will become clear in 2023 is what exactly does a Fed ‘pivot’ mean. It started off meaning interest rates would be cut, but now it seems the market views it as just less dramatic tightening of monetary policy. If 2023 is the story of when we get clarity on how interest rates go in this cycle, that will also materially impact valuation.”
She added that the re-opening of the Chinese economy, if it leads to a boost in economic activity, may lead to higher commodity prices in 2023.
Fahad Kamal, chief investment officer at Kleinwort Hambros said his “base case” is that a significant recession will happen in 2023, and for this reason, he is focused on keeping high allocations to cash and bonds.
Caroline Shaw, multi-asset investor at Fidelity International, said: "In 2022, if you think about how markets have performed, the fact that both bonds and equities have performed poorly is what 2022 will be remembered for. This has only happened maybe four times in 150 years. In 2023, cheap money is gone, QE is over. The world we have lived in since the 1980s. of lowering inflation and lower interest rates is over. We are expecting a recessionary environment in 2023, I think it is accurate to say there will be a global slowdown. Energy bill impact is huge. Lots of people who are highly leveraged are having their debts magnified and that will impact in 2023, and will be right up the income demographics. So the consumer is cutting back."
In terms of what this means for investors, she says she is underweight equities, but within the equity allocations she does have, she is avoiding the consumer sectors and owning areas such as pharmaceuticals. In recent days she has moved to a neutral, having previously been overweight, and instead is buying emerging market equities.
david.thorpe@ft.com
