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Gloom and boom: Fund managers’ top picks for 2023

King Dollar’s reign is (finally) coming to an end, bonds are rising and emerging markets are rising again, these are just some of the trades international money managers are betting on in 2023.


Skyrocketing inflation and the global underbelly of nearly 300 rate hikes by central banks over the past 12 months put the focus firmly on how badly economies are now collapsing, and whether that is forcing the Federal Reserve and Co to change course.


The dollar index, which measures the greenback’s performance against major peers, gained more than 15% from January to November 2022, when the Fed aggressively hiked rates.


The Fed remains aggressive, but markets are testing its resolve. Joe Little, global chief strategist at HSBC Asset Management, tips the dollar index to fall more than 10% in 2023 “based on a spike in inflation and a policy change from the Fed.”


The yen could also be a driving force after the Bank of Japan delivered a belated surprise by abruptly changing the yield curve control program it has used to keep rates close to zero.


Investors see Chinese stocks as a comeback story after a torrid few years, aided by an easing of COVID-19 restrictions, a renewed focus on economic growth and a strengthening of the battered real estate market.


With COVID deaths rising again, uncertainty remains, but enthusiasm is undoubtedly there for a reopening that will ultimately also boost Asian capital markets and deal closing.


MSCI’s China Index (.dMICN00000PUS) gained nearly 40% from November to mid-December, but more is possible. BNP Paribas thinks travel, domestic consumption and technology stocks can rise further and has upgraded China to “overweight” in its 2023 model portfolio, which includes stocks like Tencent (0700.HK) and Trip.com.


Whisper it, but emerging market (EM) bulls are back after 2022 delivered some of the biggest losses ever.


With the caveat that global interest rates stabilize, China eases COVID restrictions and nuclear war is averted, UBS estimates EM stocks (.MSCIEF) and fixed income indices could earn between 8 and 15% in 2023 based on total efficiency.


A “bullish” Morgan Stanley expects a return of nearly 17% on emerging market local currency debt. Credit Suisse is particularly into hard currency debt and DoubleLine’s Jeffrey Gundlach, dubbed the “bond king,” has emerging market equities as his top pick.


Performance after previous prices underlines this wave of optimism. MSCI’s EM stock index rose 64% in 1999, after the Asian financial crisis, and 75% in 2009. Emerging market hard currency debt also rebounded by as much as 30% after the global financial crisis eased by 12% decreased.


After the worst year ever for bond investors, many are seeing a turnaround.


Inflation – the bond market’s nemesis as it drives up rates and erodes yields – looks likely to moderate this year as recessions begin to itch.


Economists polled by Reuters expect headline US inflation to slow to 3.1% by the end of 2023. Valentine Ainouz, fixed income strategist at the Amundi Institute, predicts that the 10-year US Treasury yield will reach 3.5% by the end of 2023, compared to the current 3.88%.


Joost van Leenders, senior strategist at Van Lanschot Kempen, bought Treasuries in August with the expectation that “inflation will decrease as economic growth slows”. He remained wary of eurozone bonds as the European Central Bank withdraws from the market and raises interest rates.


Equity investors hope that a V-shaped year for the global economy will see equities comfortably higher.


JP Morgan strategists predict “market turmoil and economic downturn” to begin with, but then a better second half if the Fed finally decides to “turn.”


Hani Redha, portfolio manager at PineBridge Investments, expects some more downward moves for US equities before bottoming out sometime in the first half of 2023, while Royal London Asset Management’s Trevor Greetham thinks it could take longer.


“I wouldn’t be surprised if it’s time to buy stocks in a year or a little longer,” he said.

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