Fund Managers’ Top Picks for 2023 – Reuters

By Naomi Rovnick, Alun John, and Marc Jones

The era of a strong dollar may be drawing to a close, with bond markets rebounding and emerging markets showing signs of recovery. These are just a few of the trends that international money managers are banking on for 2023.

With soaring inflation and nearly 300 interest rate hikes from central banks globally in the past year, the spotlight is on how much pressure these economies can withstand and whether it will compel the Federal Reserve and others to rethink their strategies.

Here are five key trades garnering investor interest:

1. End of the Strong Dollar
   The dollar index, which tracks the greenback against major currencies, surged over 15% from January to November 2022 due to the Fed’s aggressive rate hikes. While the Fed maintains a hawkish stance, market participants are beginning to question this approach. Joe Little, global chief strategist at HSBC Asset Management, predicts the dollar index could drop more than 10% in 2023, citing peaking inflation and a potential shift in Fed policy. The yen may play a significant role in this shift, especially following the Bank of Japan’s unexpected modifications to its yield curve control program. Chris Jeffrey, head of rates and inflation strategy at Legal & General Investment Management, noted, "If I had to pick one currency against the dollar, it would be the yen."

2. Investing in China
   Chinese equities are seen as ripe for recovery after a challenging few years, spurred by the easing of COVID-19 restrictions and a renewed focus on economic growth and stabilization of the property market. Despite rising COVID-related fatalities introducing some uncertainty, optimism remains for a reopening that could enhance Asian capital markets and stimulate deal-making. MSCI’s China index rallied nearly 40% from November to mid-December, and BNP Paribas has upgraded China to "overweight" in its 2023 portfolio, highlighting stocks like Tencent and Trip.com.

3. Rebounding Emerging Markets
   After a challenging 2022, emerging market bullish sentiment appears to be resurgent, provided global interest rates stabilize, China continues to relax COVID restrictions, and geopolitical tensions remain subdued. UBS projects that emerging market stocks and fixed income could see returns of 8-15% in 2023. Morgan Stanley expresses a bullish outlook, forecasting nearly a 17% return on emerging market local currency debt. Credit Suisse favors hard currency debt, and Jeffrey Gundlach, recognized for his insights on bonds, lists emerging market stocks as a top choice.

4. Bonds Make a Comeback
   Following a historically bad year for bond investors, many analysts anticipate a turnaround. Inflation, typically a thorn in the side of bond markets due to its pressure on rates and returns, is expected to moderate as economic growth slows. Economists predict U.S. inflation will decrease to around 3.1% by the end of 2023. Valentine Ainouz, a fixed income strategist, forecasts the bond yield will retreat from approximately 3.88% to 3.5% by year-end. Some investors, like Joost van Leenders of Van Lanschot Kempen, are already diving into Treasuries, expecting inflation to decline as economic activity contracts.

5. Equities: A Cautious Approach
   Equity investors are projecting a challenging start to 2023, with hopes for a significant recovery later in the year. JP Morgan strategists anticipate initial market turmoil and economic downturn, followed by stabilization and growth in the latter half as the Fed potentially pivots. Hani Redha of PineBridge Investments suggests that further dips in U.S. stock prices are likely before reaching a low point in the first half of the year. Trevor Greetham of Royal London Asset Management believes it might take longer for recovery to unfold.

Investors seem to be positioning themselves cautiously but optimistically for a reshaped economic landscape in 2023.