Cross Asset Investment Strategy - January 2023

An economic backdrop characterized by high risk of policy mistakes and strong regional divergences calls for a prudent stance in risk assets, especially now that markets are priced for perfection, leaving little room for any negative surprise. We remain constructive on bonds, in particular govies and high quality credit, and we see opportunities opening up in Emerging Markets, as the dollar will likely cease to be a headwind.

2022 ended in an abrupt fast-track reopening. In one month, China dropped most of its Covid-related restrictions, vowed to support the housing market more, and set pro-growth policies. We expect the Chinese economy to be separated from the global slowdown in 2023, accelerating from a low base.

The energy crisis resulting from the war in Ukraine has altered profoundly Europe’s economic performance and prospects. Countries have been affected unevenly, based on how dependent they are on Russian gas and oil. German industry has been particularly hard hit. Beyond industry, the entire German economic model is now at stake. Here we provide an update on the prospects for the German economy for 2023-24. Then, we recall that the challenges to be met are Europe-wide, and that only a coordinated approach at the EU level will enable member countries to meet them. On this front, recent news is moving in the right direction.

We maintain the probabilities of our scenarios unchanged. Some of the risk factors we identify may occur in our central scenario, which is probably not yet fully priced-in by markets. Risks remain skewed to the downside in the short term, but it would take a combination of several risk factors to trigger the downside scenario at the 12-18 month horizon. At this horizon, we believe that the downside is counterbalanced by an upside scenario, that of a rapid decline in inflation due to an easing of gas prices, a ceasefire in Ukraine, and/or to the combined tightening of global monetary policies, the impact of which can be underestimated.

Macroeconomic Picture by area and Macro and Market forecast.