Q1 2023

Capital Markets Outlook

January 2023

 

 


   

Highlights

Macro
  • 2023 will be a year of transition, with a gradual fading of price pressures and an increased focus on slower growth.

  • The path of US inflation will be defined by goods prices, shelter inflation and core services inflation. Wage pressures need to slow to bring down inflation.
Rates
  • Central banks are tightening monetary policy to fight inflation.

  • Higher treasury yields could provide a cushion to risk assets once correlations normalize.
Credit
  • BBBs valuations look fair vs. BBs despite weaker growth.

  • High-yield companies are entering the current environment in a position of strength.
Emerging-Market Debt (EMD)
  • Be selective in hard-currency sovereigns and corporates.

  • Some EM local markets are starting to become attractive as the rate-hike cycle is diminishing.
Equity
  • Valuations: price discovery continues to remain challenged, but we enter 2023 at more reasonable levels.

  • As fears pivot to recession, earnings move to the spotlight.
 
  1. Rates
  2. Credit
  3. EMD
  4. Equity

Macro

Inflation Remains High, but Recent Developments Suggest Some Room for Optimism

While Still Near Multi-Decade Highs, Inflation Has Declined from Recent Peaks

As of November 30, 2022; Australia as of September 30, 2022
Source: Bloomberg and AB

The Situation in Europe Remains Challenging, but Recent Developments Have Been Better than Expected

As of January 3, 2023
Source: Bloomberg and AB

Current analysis does not guarantee future results.

Rates

The Aggressive Fed Rate Hikes Have Led to Some of the Worst Bond Returns in History

The Quickest Rate Hike Sequence Since the 1970s

As of December 31, 2022
Source: Bloomberg, J.P. Morgan, S&P and AB

No Place to Hide: Both Stocks and Bonds Down in 2022
Annual returns since inception of US Aggregate Bond Index (percent)

As of December 31, 2022
Source: Bloomberg, J.P. Morgan, S&P and AB

Historical analysis does not guarantee future results.
Sector indices provided by Bloomberg

Credit

High-Yield Companies Are Entering the Current Environment in a Position of Strength

The Starting Point of HY Fundamentals Is Very Strong
Interest coverage (EBITDA/interest)

As of November 30, 2022
Source: Bloomberg, J.P. Morgan, Morgan Stanley, S&P Compustat and AB

Only 20% of HY Market Is Maturing over Next Three Years

As of December 30, 2022 
Source: Bloomberg, J.P. Morgan, Morgan Stanley, S&P Compustat and AB

Historical analysis does not guarantee future results.
HY: high yield; EBITDA: earnings before interest, taxes, depreciation and amortization

EMD

We See Select Opportunities in Emerging Markets

Emerging-Market (EM) Landscape

EM Landscape: After holding a more pessimistic view of EM debt for most of 2022, we are cautiously turning more constructive going into 2023. 

  • Hard Currency Sovereigns: While valuations are attractive in the hard currency space, uncertainty remains high, and selectivity is crucial
  • Hard Currency Corporates: We see some opportunities in EM corporates, which display attractive risk-adjusted returns over the long-term relative to developed markets
  • Local Currency: Some EM central banks are approaching the end of their tightening cycles, with signs of core disinflation and attractive yield premiums. This increases the attractiveness of EM local debt

Analysis provided for illustrative purposes only and is subject to revision.

Some EM Local Markets Are Starting Become Attractive Based on Our Criteria

As of December 31, 2022
Source: Bloomberg and AB

Equity

Almost Every Sector Declined in 2022

Value and minimum-volatility outperformed growth

MSCI World Sector Returns
Full-Year 2022 (percent)

As of December 31, 2022
Source: FactSet, MSCI and AB

MSCI World Style Index Returns*
Local currencies (percent)

As of December 31, 2022
Source: FactSet, MSCI and AB

Past performance and current analysis do not guarantee future results.
*Based on MSCI World Value, MSCI World Minimum Volatility and MSCI World Growth