Robeco has published its outlook for 2023 predicting a significant brightening of the return of major asset classes given inflation, interest rates and the US dollar reach major peaks first.
In its '2023 Outlook: Short-term pain, long-term gain', the Dutch asset management firm said that the peaks in inflation, interest rates and the US dollar are in sight but have yet to reach.
The central banks are still struggling to control inflation. Meanwhile, short-term sovereign bond yields stay above official rates, and the dollar continues to "reign supreme".
Once the economy reaches the three peaks in inflation, rates and the US dollar, "2023 will ultimately contribute to significantly better returns across all major asset classes", said Colin Graham, head of multi-asset solutions at Robeco.
The recessions are highly disinflationary, "we believe this will take the sting out of inflation, " he added.
Robeco is expecting earnings per share drop of 20-30% in 2023, making high-yield valuations favourable in contrast to equities.
Unemployment is likely to surge 5%, and disinflation would increase in mid-2023, creating good entry points for long duration in fixed income, followed by decent "troughs in risky fixed income and equity markets", the asset manager asserted.
Europe will face a "trade-off between efficiency and economic crisis" during the persistent energy crisis in 2023. Robeco implied that increasing energy efficiency would not be enough for the region to become independent of Russian gas.
Price caps for lower-income households may also increase demand, worsening the energy crisis. Nonetheless, Robeco expected to see energy transition goals lining up with accelerated energy security and reduced carbon footprints.
The asset manager anticipated sustainable investing strategies to continue growing in 2023 "as investors continue to seek solutions to the multiple challenges facing humanity, including climate change, the cost-of-living crisis and income equality".
Rachel Whittaker, head of SI research at Robeco, said: "We believe there are several reasons why sustainable investing will grow AuM faster than the industry – one is that there is evidence that integrating ESG considerations alongside financial analysis can support financial returns over the long term, for example through reducing unanticipated environmental or social risks, or identifying new growth opportunities."
Enhanced societal awareness is another primary reason investors seek to invest in climate-friendly funds, "while the growing range of sustainable strategies available makes it possible for more investors to target both sustainable and financial goals".
Regarding emerging markets, Robeco said that the upcoming year could be good for emerging market equities, excluding China, because central banks have pre-empted developed markets' central banks in battling inflation
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