2022 has been a “year to forget” for some fund managers but given the events of this year, it will be more likely to stick in memories forever.
The revolving door at Westminster has created huge uncertainties for the markets, not to mention the highest inflation for decades, an energy crisis and a central bank intervention to protect UK defined benefit pension funds plummeting further into a blackhole.
Frédérique Carrier, head of investment strategy in the British Isles and Asia at RBC Wealth Management, says: “Having contended with the economic shocks of Brexit, the Covid-19 pandemic, and this year’s energy crisis, the UK is the only G7 economy still languishing below its pre-pandemic output levels. It is now being subjected to sweeping tax increases and spending cuts totalling almost 2 per cent of GDP even as the Bank of England tightens monetary policy and a recession starts.”
But it is time to turn attention to 2023, and managers are full of predictions for the financial outlook next year, and much of it sounds bleak.
Carrier says: “We believe the Bank rate will reach 4 per cent at the end of the current tightening cycle. This is in contrast with markets, which are discounting a peak interest rate of 4.6 per cent by mid-2023. Overall, the result of all this will likely be a long, drawn-out recession, which we think could last well into 2024. Consensus economic forecasts for the UK point to a 0.75 per cent contraction in 2023, but we believe risk may be to the downside as the impact of austerity gets further incorporated into forecasts.”
And it is not just the UK facing a prolonged downturn. Pictet Asset Management says the US and the rest of the EU economic area can expect to suffer similar conditions.
“We forecast a mild recession in the US and the euro area in 2023, with real GDP contracting by 0.2 per cent in both places. Significant tightening of financial conditions along with the largest inflation shock to real incomes in decades will continue to take their toll on economic activity.”
However, there are some who proffer slightly more optimistic views on the possibility of a recovery towards the back end of next year.
Andrew Pease, global head of investment strategy at Russell Investments, says “The main issue for 2023 is whether inflation pressures ease sufficiently to allow central banks to step away from rate hikes and potentially begin easing. We expect inflation will be on a downward trend as global demand slows. This should allow central banks to eventually change direction and may set the scene for the next economic upswing.”
Pease adds that he expects the next US recession to be “relatively mild, particularly because household and corporate balance sheets are in good shape”.
Aside from inflation, he doesn’t see any significant obvious economic imbalances.
He says: “It’s reasonable to expect that a recession in 2023 will see GDP decline less and unemployment rise by less than the average for modern recessions.”
Making its annual ‘outrageous predictions’, Saxo says gold will rocket up to USD3,000 as central banks fail on the inflation mandate; a country will introduce a total ban on meat production by 2030; the foundation of an EU Armed Forces; and the UK will hold another Brexit referendum.
If this year is anything to go by, stranger things have happened.