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December 20, 2022

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BIL Investment Outlook 2023

Preparing for landing

Our Investment Outlook for the year ahead is now available.

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Introduction from our Group Chief Investment Officer, Lionel De Broux

Lionel De Broux, Group Chief Investment Officer, BIL

2022 was the year of stickier-than-expected inflation which forced central banks to retire the “transitory” narrative and take decisive action to bring it back down to target.

As central banks continue to tighten policy, the key question for 2023 is whether they will be able to orchestrate a “soft landing” for their respective economies. For those of you who have seen the French movie “La Haine”, as Vinz says, “It’s not how you fall that matters. It’s how you land.” Because all the way down, the feeling is generally “so far, so good.” In today’s context, a soft landing for the economy would constitute a very mild recession, involving slightly higher unemployment and just enough demand reduction to curb inflation.

Under the alternative scenario – a “hard landing” – a full-blown recession and a spike in unemployment would be the price to pay for bringing down inflation.

Given that it takes time for the cumulative effect of tighter monetary policy to work its way through the economy, central banks are not only confined to a rear-view mirror – they are also driving in the dark, in that they must decide how much tightening is still appropriate while previous actions have not yet wielded their full impact. If they don’t tread carefully, they risk overtightening, leading to a hard landing. Contrastingly, if they pivot too soon, the result could be a structural unmooring of long-run inflation expectations and potentially a 1970s-style price spiral. The resounding message from the Fed’s Jackson Hole symposium and the IMF autumn meetings was that central banks should avoid relaxing too soon in their inflation battle – a move that would likely deliver the pain of recession without any of the sustained gains on inflation.

If inflation drivers cool in a convincing manner, less monetary headwinds would be needed. The good news is that headline inflation does seem to be trending downwards in the US and appears close to peaking in Europe. This could allow central banks to take their foot off the gas, adopting a “slower for longer” approach, giving them more flexibility to fine-tune monetary policy with incoming data as the year progresses.

In all, whether we have a hard or a soft landing is yet to be seen. While the Fed has had a mixed record in accomplishing soft landings during past rate hiking cycles, the sheer strength of the US economy probably means the worst-case scenario could be avoided. In Europe, much depends on the ability of governments to effectively manage the ongoing energy crunch. Encouraging is the fact that in several emerging markets, where central banks started hiking rates much earlier, activity has been resilient thus far while inflation is starting to retreat – Brazil being a good example.

Beyond the actual landing process, 2023 might be a more pleasant destination for investors than 2022 has been. Over the past year, markets have had to grapple with accelerating inflation, an expedited rise in interest rates and higher bond yields. Combined, these factors have weighed on equity returns while a breakdown in correlations between stocks and bonds meant that any shock-absorption inside portfolios provided by fixed income assets was ineffective. Looking to the new year, if we are to begin our outlook on an optimistic note, it appears that the bulk of the upward shift in this trifecta of forces is behind us. On top of that, the era of sub-zero yields has come to a close and, once again, bonds provide an income stream.

Nonetheless, we do expect continued turbulence ahead, with volatility arising from incoming macro data and central bank communication as they try to get it right with regard to tightening. We also have to consider that as financial conditions tighten so too do the chances of unforeseen and undesirable side-effects. As such, we enter the new year with a conservative asset allocation, focusing on arising opportunities in the fixed income space. That said, for investors who have an investment time horizon that allows, it is important to remember that cyclical downturns can be seen as an opportunity to build up positions in great companies with sound long-term prospects.

In order to look through market turbulence, we also keep our gaze focused on long-term investment themes which are structural in nature. These include sustainability, with the European energy crunch making the sustainable transition more critical than ever and the US adopting its biggest ever clean energy bill, digitalisation as we move towards a smarter, more connected world, and healthcare innovation, as the sector enjoys a tailwind from demographics, increasing health awareness and medical advancements.

In this outlook, we will discuss all of the above in greater detail with the aim of providing better visibility on the investment landscape in the upcoming year. With that, I wish you an excellent holiday period and a great start to the new year.

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

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