Investors are looking forward to a new year that has one redeeming quality – it doesn’t mirror the annus horribilis of 2022. Robeco’s outlook for ‘short-term pain, long-term gain’ warns that 2023 is likely to see recession, and that investors need to wait for inflation, interest rates and US dollar strength all to peak before the good times resume.
The current consensus isn’t that rosy, but if history tells us anything, it’s that nothing is ever set in stone. So, what are the possible events – good and bad – that could derail these central scenarios? As we enter 2023, the Robeco Sustainable Multi-Asset Solutions team outlines 10 potential black swans, and what the consequences may be.
The first is ‘Goldilocks’ revenge’ – the economic porridge won’t be too hot or too cold but just right. “Here, US inflation peaks without a recession, the dollar drops, and the US Federal Reserve (Fed) can rest easy but remain vigilant,” says Colin Graham, Head of Multi-Asset Strategies at Robeco.
“The post-Covid fiscal expansion slows, acting as the brake on excess demand. The result for multi-asset investors is that high yield bonds become very attractive as default rate expectations fall.”
Alternatively, the Fed could tire of low long-term rates and review its inflation target, citing a structural break with the previous regime that had largely been in place since the global financial crisis.
“It could claim that the 2% target is far too close to zero, saying the next recession could tip the economy into outright deflation,” Graham says. “The result would be panic, and bonds denominated in US dollars would see negative returns for the third year in a row.”
Even worse is the prospect of deflation. While falling prices sounds great, it means consumers would not buy anything as they expect goods to become cheaper in the short term, leading to outright recession.
“Here, if deflation has a higher number of hits than inflation according to newsflow data from Wall street and Main Street, it means that central banks are driving the economy using the rear view mirror, causing a major bust,” Graham says.
The drive to improve the environmental, social and governance (ESG) characteristics of companies has enormously gained in importance, and is the bedrock of investments at Robeco. The problem is that it has also led to a rise in greenwashing, where companies and investors make ESG claims that cannot be substantiated, often for PR and marketing reasons.
Another growing problem is impact washing, where companies or investors claim to be making an impact on the ground, when proving or even measuring it is doubtful.
“We see the potential for sustainability claims to be more strongly scrutinised by regulators, media and investors, and as a result, large financial institutions will struggle to evidence their sustainability credentials across facets of their businesses,” Graham says.
“Rather than focussing on improving their ESG and delivering shareholder value, companies could end up selling or divesting businesses that don’t meet ESG criteria and withdraw from markets where regulators demand higher sustainability credentials.”
One lesser-known issue concerns risk appetite, where multi-asset investors are asked to state the level of risk that they can tolerate. These risk profile portfolios are usually labeled as ‘cautious’ – i.e. low risk, focusing on safer government bonds; ‘balanced’, offering more of a mix of bonds and equities; or ‘aggressive’ strategies that may well allocate to much riskier stocks.
The problem here is that in 2022, there was little difference between any of them. “The performance of these profiles was within 20 basis points (in euro terms) by the end of December,” says Graham. “If this happens again in 2023, the implication would be we would see a second year of negative returns in balanced portfolios, similar to the experience following the tech bubble burst of 2001-2002.”
But it’s not all bad news. Much of the consensus opinion assumes that the war in Ukraine which caused so much volatility in markets in 2022 and sparked major inflation across the world will continue. If peace breaks out, a more welcome disruption would occur.
“We could see a peace dividend in which Ukraine secures its borders with European ‘aid’ and the flow of wheat, oil and gas resumes, ending the bottlenecks,” Graham says. “Other countries would then relax their travel and trade restrictions, allowing inflation to fall and supply chains to re-shore faster. There would be an energy costs windfall for global economies, especially in Europe.”
Social media is another battleground, albeit where the participants are armed with words rather than weapons. Stricter regulation against the tech titans that fueled growth stocks could benefit value stocks instead.
“We could see another backlash against social media and more regulation on large technology and social media platforms as data protection issues come to the fore again,” says Graham. “The result would be a change in equity market leadership – value companies with capital discipline and quality earnings would be more highly rewarded on a relative basis.”
Then there is the possibility of a ‘shock regime change’, as witnessed when the UK which went through three prime ministers in 2022. “This is the first year this century without an election in a G7 country,” says Graham.
“However, we could see a major shift in policy as a ‘major’ regime topples, as witnessed with Boris Johnson and then Liz Truss a month later, resulting in major volatility spikes.”
Truss’s brief prime ministership and a disastrous mini-Budget which forced the Bank of England to take emergency measures to protect the pensions industry showed just how fragile certain financial systems can still be.
“In this scenario, private assets see a liquidity drain, liability-driven investment (LDI) structures are questioned, and there is increased scrutiny on banks following a crypto bust,” says Graham. “This would expose investments that were only funded because cash was ‘free’ at the time.”
Finally, the commitment to moving to a net-zero economy could surprise on the upside. “There can be no backtracking on climate: the evidence about climate change continues to mount, and COP27 highlighted that political will is key to shaping the balance between climate ambition and implementation,” Graham says.
“In the long run, achieving energy security means investing more in green technologies and climate solutions to close the gap between ambition and implementation. We could see a multinational ‘super fund’ set up to facilitate the net zero transition, backed by several governments.”
“No-one has that illusive crystal ball that can provide perfect foresight on events that affect market returns, and even if we did, then recent history shows that investors can still infer the wrong market reaction.”
“At Robeco, the Sustainable Multi-Asset Solutions team is prepared for another turbulent year and plans to invest with a contrarian mindset, which added value in 2022. We are also firm believers that the climate battle and sustainability transition will reaccelerate.”
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the Securities and Futures Commission in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
此網站由Robeco Hong Kong Limited（「荷寶」）擬備及刊發，荷寶是獲香港證券及期貨事務監察委員會發牌從事第1類（證券交易）、第4類（就證券提供意見）及第9類（資產管理）受規管活動的企業。荷寶不持有客戶資產,並受到發牌條件所規限。荷寶在擴展至零售業務之前,必須先得到證監會的批准。本網頁未經證券及期貨事務監察委員會或香港的任何監管當局審閱。
Robeco Capital Growth Funds以其特定的投資政策或其他特徵作識別，請小心閱讀有關Robeco Capital Growth Funds的風險：
荷寶保證將會根據現行的資料保障法例，以保密方式處理登入此網站的人士的數據。除非荷寶需按法律責任行事，否則在未經登入此網站的人士許可，不會向第三方提供該等數據。 請於我們的私隱及Cookie政策 中查找更多詳情。