Rapidly rising interest rates in response to record-high inflation, an energy crisis as a result of the war in Ukraine and supply chains that continue to falter – this "toxic cocktail" has contaminated almost all asset classes in 2022.
Calculated in Swiss francs, the MSCI World is listed around 14 percent lower than at the beginning of the year (as at: November 7, 2022). The global bond index (Bloomberg Global-Aggregate Total Return Index, unhedged) has also lost around 14 percent. Listed Swiss real estate funds (SWIIT Index) likewise declined sharply. In this case, the drop is a considerable 18 percent.
"This investment year 2022 may go down as the seventh worst in Switzerland's hundred-year financial market history," says Anja Hochberg, Head of Multi-Asset, in a video interview for this year's Market Outlook 2023.
The dark clouds will not disappear completely in the coming investment year. However: "We see some silver linings on the horizon for 2023," says Hochberg.
Trend 1: Renaissance of the multi-asset portfolio
The turnaround in interest rates further highlights the advantages of the bond component in a multi-asset portfolio yet again. A significantly higher contribution to returns from bonds can be expected than in previous years. The total market return for the Swiss market (Swiss Bond Index) is currently around 2 percent.
During the negative interest rate period, a bond portfolio was not only associated with falling returns, but also with rising interest rate risks, i.e. a higher duration. This has now been reversed. Higher yields on the bond markets go hand in hand with lower interest rate risks.
Trend 2: Mild recession anticipated
Recessions, especially when severe, are toxic to equity markets and other risky investments. We anticipate a recession, but only a mild one. The reasons are as follows:
- The US labor market remains robust.
- Consumer debt is within limits.
- The majority of banks are in a solid position and companies demonstrate robust sustainability in terms of debt levels.
- An exaggerated investment boom, as in the 2000s, or a massive overvaluation of real estate, as in 2008, is not evident.
The low point of economic growth is expected to occur around mid-2023. Experience has shown that the equity market is one of the best early indicators of future economic development. Given that inflation has peaked and valuations are still falling slightly, an end to the market downturn and a subsequent recovery in the first quarter of 2023 are to be expected.
The current trend of inflation supports this cautious optimism. In the USA, the inflation peak has already passed. Price-driving goods such as commodities, food prices, prices for second-hand cars and, in particular, freight prices have all fallen. Even rental prices for US properties have been falling since last October.
