Four things investors need to watch out for in 2023

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A hard landing is one of the four main investment trends advisers should watch out for in 2023 according to Andrew McCaffrey, global chief investment officer at Fidelity International.

The first area he has identified is the tug of war between the need to raise interest rates to combat inflation, even at the risk of causing a deeper recession by reducing the level of demand in the economy.

He says: “Inflation has dogged markets this year and is likely to remain high, bringing an end to the era of easy money and increasing the risk that overtightening by central banks will trigger a sharp recession, an ‘inflation bust’.

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According to McCaffrey, markets want to believe that central banks will blink and change direction, negotiating the economy towards a soft landing.

But, he adds: “A hard landing remains the most likely outcome in 2023. The previous norm of central bank “whatever it takes” intervention during the financial crisis and the pandemic is going or has gone.”

In terms of what this means for investors, he says: “Until markets absorb this fully, we could see sharp rallies on the back of expected action by the Fed, only for them to reverse when it doesn’t materialise in the way they expect rates should eventually plateau, but if inflation remains sticky above two per cent, they are unlikely to reduce quickly.”

Oliver Jones, asset allocation strategist at Rathbones, says the UK is headed for a recession “regardless”, but that the recent Autumn Statement at least means the UK is pursuing the same policy priorities as its peers, something which he feels has soothed the nerves of bond market participants. 

Bang for your buck  

The second trend identified by McCaffrey is the impact of the rising dollar on other asset classes.

The dollar rises when US interest rates rise and when investors are in a risk off mood. The latter is because investors seeking safe havens tend to buy US government bonds, known as Treasuries, which are denominated in dollars.

Additionally, in times of such strife, US investors tend to withdraw their capital from overseas and bring it back to US dollar denominated assets. 

McCaffrey says: “A key factor to watch is where the dollar goes from here. In 2022, the strong dollar has proved to be a wrecking ball for other economies, both in the developed world and for emerging countries that rely on hard currency debt.

 

“If the Fed continues to raise rates, an even stronger dollar could accelerate the onset of recession elsewhere. Conversely, a marked change in the dollar’s direction could bring broad relief and increase overall liquidity across challenged economies.”

Silvia Dall’Angelo, senior economist at Federated Hermes says: “Judging by the updated forecasts, the Fed has now acknowledged some degree of pain will be necessary to bring inflation down to target and the odds of disinflation taking place without much cooling of the labour market – the so-called immaculate disinflation – are low.” 



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