Global growth will continue to “slow sharply” in 2023, as major developed economies experience “shallow” recessions, according to Aviva Investors.
The global asset management arm of Aviva has warned that the downturn will be concentrated in developed economies, with many likely to “struggle” to achieve growth.
While investors should expect central banks to make further interest-rate hikes between now and the spring, the asset management firm predicted that headline inflation has “probably peaked or is peaking” and should fall next year as energy prices stabilise or even decline.
However, core inflation remains too high and risks persisting for longer, it added.
In a statement on market expectations for 2023, Aviva Investors wrote: “Although growth has already slowed, there has been almost no easing in labour market slack, resulting in upward wage pressures and a greater risk of more damaging second-round effects on inflation. Downturns will counter this, but it will take time.
“Recessions are expected to be comparatively mild as there are few private sector imbalances to correct. However, risks are to the downside.”
Michael Grady, head of investment strategy and chief economist at Aviva Investors, revealed how the firm is positioned across asset classes, given the recent re-pricing of risk assets.
“Global markets fell in unison in 2022 as the world adjusted to higher real rates, with the pain felt across both developed and emerging markets. The dramatic shift in cross-asset correlations was also accompanied by a significant increase in asset market volatility, most notably in bond markets, but also in foreign exchange and equities,” Grady said.
“Looking ahead, we prefer to be broadly neutral in equities. Equity markets have de-rated through 2022, reflecting the move higher in real rates. We expect to see downward revisions to earnings expectations in coming quarters to weigh on markets, as a result of the shallow recession.”
Aviva Investors’ chief economist added that the firm is “modestly underweight” in duration, with upside inflation risks outweighing the downside recession risks.
However, he observed that with the peak in policy rates likely approaching, this will require “a nimbler approach” to the asset class in 2023.
Grady continued: “We take a neutral view of credit, where we think the recent rally in spreads makes high-yield less attractive going into recession. On investment grade, the all-in yield on short-dated paper does make it relatively attractive but is competing with attractive risk-free cash returns.
“Finally, we prefer to be long the US dollar going into 2023, reflecting the weakening global growth environment and the strength of underlying inflation in the United States, but think that the longer-term dollar move higher could reverse as growth prospects improve in the second half of 2023.”
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