Our 2023 asset class outlook

In a context of moderating inflation and economic slowdown, we believe long-dated US Treasuries’ safe-haven status could come back to the fore and that they will serve to protect multi-asset portfolios in case of a US recession. For this reason, we have moved from neutral to overweight on US Treasuries. 

We expect high-yield (HY) credit spreads to widen significantly later next year as the recession damages companies’ profitability, so we remain underweight on HY bonds in general and favour quality in credit. Even if yields are juicier in the HY segment, US and euro investment-grade (IG) bonds offer attractive coupons for buy-and-hold investors without having to take on too much duration or credit risk. These considerations should not be ignored in today’s volatile fixed-income markets and explain our neutral stance on both US and euro IG corporate bonds.

We expect the US dollar to decline in 2023, underperforming most other major currencies. But exchange rates could be volatile again given high global uncertainties. Indeed, recent weakness in the greenback looks overdone in the short term, especially in view of current rate differentials and the possibility that Chinese reopening does not run smoothly. Overall, we see the euro declining from the current rate of around USD1.05 to USD1.00 on a three-month horizon but expect the single cu-rency to rebound to USD1.10 at the end of next year.

DM equities are expected to lack support from earnings growth in 2023 as margin compression should eat into the positive effects of continued sales growth and share buybacks. High valuations are the main reason for our equity underweight, especially in the US. We expect pressure on US valuations to continue into 2023 as the relative attractiveness of US equities is challenged by higher yields in fixed income.Due to differences in valuation, we have a slight preference for European equities over US ones, but we remain underweight in both places. We remain neutral UK and Japanese equities.

Emerging-market (EM) equities will have to deal with the same macro challenges as DM equities but should nonetheless benefit in relative terms, starting from a more depressed starting point (both in terms of valuations and earnings). As economic activity recovers from recessionary conditions, the US dollar weakens and financial conditions improve, we would expect EM equities to outperform in the second half of next year.