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Storm in 2023? 10 tips to get the most out of your investment

Storm in 2023? 10 tips to get the most out of your investment

Volatile European markets this Wednesday -Ibex 35, CAC 40, DAX…- after a session of falls yesterday on Wall Street before different pessimistic forecasts for 2023.

The effects of tighter monetary policy, high inflation and slowing growth will last until 2023, experts say. However, once real interest rates peak, the business cycle will change, creating opportunities to increase portfolio allocations to risk assets.

Given the current uncertain situation, Stéphane Monier, CIO of Lombard Odier Private Bank, analyzes 10 recommendations to invest in 2023 and achieve maximum returns:

  1. A pivot year: looking for the tipping point
    The tightening of monetary policy in the Western world, amid a global slowdown in economic activity, translates into an unfavorable configuration for risk assets. The recession and further cuts in corporate earnings expectations are the main downside risks for both equities and bonds.

Maximum real rates should be a turning point in the markets. To do this, the Federal Reserve will have to interrupt its cycle of interest rate hikes as inflation slows and unemployment rises. “As this tipping point approaches, we will gradually increase risk levels in portfolios by adding longer duration in government bonds and gold, as well as some stocks and credits,” Monier said.

  1. Underweight risk assets for now
    Macroeconomic conditions justify prudent exposure to risky assets, focusing instead on assets that can best withstand the impact of weaker growth or higher rates. Specifically, this means holding quality stocks, government bonds and investment-grade credit. It also involves overweighting cash positions so that we can invest as soon as we see opportunities.
  2. Opt for quality and diversification
    In the coming months, we are likely to see new lows in equity markets, as high borrowing costs limit the expansion of corporate multiples and earnings estimates continue to adjust for recessions. In this context, quality companies with low profit volatility and a greater ability to defend their margins are a good option.

These stocks tend to perform better in recessions or when profits decline. As for the quality sectors, the health sector is noteworthy, since it enjoys high margins and some insulation from inflation, due to its high pricing power and attractive profitability for shareholders. It is also important to note that their valuations remain undemanding compared to other defensive growth sectors.

  1. Asymmetric profitability profiles
    Options strategies, such as sell spreads on equity indices, can protect portfolios from declines in the coming months. For this reason, “at Lombard Odier we have applied hedges to portfolios throughout 2022, and we will continue to manage them tactically depending on market conditions,” says Monier.
  2. Seek diversification through alternatives
    As market conditions will remain relatively difficult, it is advisable to favour resilient hedge fund strategies such as global, discretionary and quantitative macroeconomics. These should provide diversification, as they tend to benefit from the dispersion of performance across asset classes and regions. Their typically convex profiles, designed to perform in more extreme periods, should benefit from the volatile environment with limited correlation with the underlying markets. Some relative value strategies should also offer attractive returns once rates stabilize.
  3. The strength of the dollar will continue
    The strength of thedollarshould be maintained in the coming months, supported by rate differentials, liquidity constraints and US trade aspects. Other currencies supported in this context are theSwiss francand, potentially, theJapanese yen. Theeuroand thepound sterlingThey should be left behind, as they suffer more structural problems related to the energy shock. The Chinese yuan should also underperform, as the country’s solid balance of payments begins to weaken.
  4. Increasing the attractiveness of gold
    For much of 2022, prices forgoldThey were caught between the support of geopolitical and recession risks, and downward pressures from real rates and the strength of the dollar. For Monier, “with lower rates, a weaker dollar and a China that reopens, gold prices should rise. In October we sold sell positions on gold, as a potential means of bringing our position to neutrality.”
  5. High-yield loans, increasingly attractive
    As investor sentiment improves, appetite for risk assets will increase. Once high-yield credit spreads better reflect the price of a recession and rates have stabilized, carry in this segment will be more attractive than investment grade and sovereign bonds.
  6. Equities as a buying opportunity
    As inflation and the threat of higher rates begin to fade, stock valuations and multiples will benefit. The easing of financial conditions will improve investor sentiment and, in turn, widen price-earnings ratios. By mid-2023, earnings and sales expectations will be revised downwards, and markets will start looking ahead to 2024 and recovery from the cyclical slowdown. This will offer opportunities to add exposure to cyclical and growth names.
  7. Emerging Market Stocks and Local Currency Bonds
    When the Fed interrupts its cycle ofInterest rate hikesAs inflation slows and unemployment rises, EM assets are likely to pick up. However, a change in sentiment and growth dynamics is needed. If these catalysts materialize, EM equities will outperform developed markets and EM local currency debt will look increasingly attractive. “While we are already gradually more constructive with respect to EM local rates, given well-advanced currency cycles, we expect EM currencies to recover from low levels only when financial conditions improve,” concludes Monier.
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