A Year of Inflections

Year Ahead 2023

Welcome

Year Ahead 2023

Navigating inflection points will be key to investment success in the year ahead. It will be our challenge and privilege to help guide you through them. We thank you for your trust and look forward to helping you realize your financial goals.


A Year of Inflections

In 2022, inflation stayed high, interest rates rose, growth expectations fell, and both equity and bond markets suffered. 2023 will be a year of inflections as investors try to identify turning points for inflation, interest rates, economic growth, and financial markets against a complex geopolitical backdrop.

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      What does it mean for investors?

      History tells us that durable turning points for markets tend to arrive once investors begin to anticipate interest rate cuts and a trough in economic activity and corporate earnings. As we enter 2023, high inflation and rising interest rates alongside elevated earnings expectations and geopolitical risks inform our investment themes of defensives, value, income, and safety. But we think the backdrop for risky assets should become more positive as the year progresses. This means investors with the patience and discipline to stay invested should be rewarded with time. Investors currently sheltering from volatility will need to plan when, and how, to rotate back into riskier assets over the course of 2023.

      Policy risks

      What might derail a market inflection point?

      The past year has demonstrated how policy choices not only add to volatility, but also have the potential to change the trajectory of asset markets. Russia’s invasion of Ukraine, China’s approach to managing COVID-19, and even the financial instability spurred by the UK’s “mini-budget” all affected global economies through multiple channels. In 2023, the key policy risks include an escalation in the Russia-Ukraine war, economic policy missteps in China, heightened geopolitical tensions, and monetary or fiscal policy errors.

      Escalation in the Russia-Ukraine war

      As well as being a humanitarian and environmental disaster, Russia’s invasion of Ukraine in 2022 had a significant impact on the global economic trajectory—adding an inflationary shock to a world already navigating resurgent demand, tight labor markets, and supply chain disruption.

      As we enter 2023, Russia’s annexation of occupied territories in Ukraine poses a threat to global markets. The annexation brings these areas under Russia’s nuclear doctrine, meaning that if Ukraine continues its efforts to reclaim these regions, a retaliation by Russia beyond conventional warfare cannot be ruled out. In turn, this would increase the risk of a direct confrontation between NATO and Russia.

      Economic policy missteps in China

      After many years in which China’s policy measures were oriented toward driving economic growth, the country’s leadership is now focused on achieving a broader range of objectives—including self-sufficiency, national security, and common prosperity. In the near term, the greater consolidation of power under President Xi following the 20th Party Congress has prompted concerns about a continuation of pandemic controls. If China extends its zero-COVID policy through all of next year, it would make it less likely that global growth will trough in 2023.

      Separately, the consolidation of power has also led to investor concern over less support for the private sector, a heightened risk of policy mistakes, and lower long-term rates of economic growth.

      Heightened geopolitical tensions

      Antagonism between the US and China continued to rise in 2022. China’s refusal to condemn Russia in its war with Ukraine, US House Speaker Nancy Pelosi’s visit to Taiwan, and military drills around the island heightened tensions. Meanwhile, the US CHIPS Act and White House directives to restrict China’s access to advanced technologies have added to the trend of technological divergence between the two nations.

      In 2023, Taiwan will remain a potential geopolitical flashpoint. President Xi remains committed to reunification while President Biden has repeatedly stated that US forces would come to Taiwan's defense in the event of an “attack.” Although attempts to reunify mainland China and Taiwan are unlikely to materialize next year, tensions surrounding national security are likely to mean a continuation of technological and supply chain localization, with implications for sectors across Asia.

      Geopolitical tensions are not limited to those between the US and China.

      In October, President Biden warned Saudi Arabia that “there will be consequences” after it joined with Russia and other OPEC+ producers to cut oil output. A risk for the market in 2023 would be if Biden’s “consequences” prompt a further output cut by Saudi Arabia, sending oil prices higher and weighing further on the growth outlook.

      Monetary and fiscal policy errors

      Disruption in the UK gilt market in 2022 illustrated the challenges facing governments that try to increase borrowing while central banks sell government bond holdings to reduce inflation. While events in the UK had idiosyncratic aspects, a risk for next year is that the UK might be a forerunner of financial instability in other markets.

      In the Eurozone, we are monitoring the risk that the unwinding of quantitative easing could prompt stress in bond markets. The European Central Bank’s Transmission Protection Instrument is designed to mitigate these challenges, but it remains unclear how it would work in practice, and it is unlikely to be deployed proactively.

      In the US, as the Fed conducts quantitative tightening, we are monitoring for the risk of a funding squeeze similar to 2019, when the Fed’s balance sheet run-down caused undue tightening in dollar funding conditions. Meanwhile, a divided US government could presage potential battles over the federal budget and debt ceiling, which could affect markets.

      Oil transmits geopolitical tension into economic outcomes

      Brent crude oil prices, in USD/bbl

      Chart showing Brent crude oil prices in USD/bbl from January to November 2022
      Source: Refinitiv, UBS, as of 10 November 2022

      What to do with China exposure?

      China’s stock market suffered a 44% loss in the first 10 months of 2022, in part because stricter COVID-related mobility restrictions hampered consumption and new business investment. At the time of writing, China’s weight in the MSCI All Country World Index is close to 3%. We think this level of holdings of Chinese stocks in global equity portfolios is adequate given the near-term risks from the country’s ongoing zero-COVID policy and challenges in the property sector. We recommend overexposed investors diversify into global defensives and value. That said, China’s economy may offer long-term opportunity for investors who have no allocation to the country, particularly in the supply chains of electric vehicles and renewable energy, and in consumer services and durables.

      2022 in review

      Four things we got right

      • Look beyond mega-cap tech
      • The US dollar would strengthen and gold would fall
      • Energy equities and hedge funds would help shield portfolios
      • Crypto is an "entertainment" trade, not an investment

      Four things we got wrong

      • We did not expect the Russia-Ukraine war
      • Inflation would fall
      • Monetary policy would tighten modestly
      • Bond yields would rise slightly

      Here is what happened as a result:

      Asset class forecasts

      Developed market currencies

       

       

      Spot

      Spot

      Mar 23

      Mar 23

      Jun 23

      Jun 23

      Sep 23

      Sep 23

      Dec 23

      Dec 23

      PPP

      PPP

       

      EURUSD

      EURUSD

      Spot

      1.03

      Mar 23

      0.96

      Jun 23

      0.98

      Sep 23

      1.00

      Dec 23

      1.04

      PPP

      1.30

       

      USDJPY

      USDJPY

      Spot

      140

      Mar 23

      155

      Jun 23

      150

      Sep 23

      140

      Dec 23

      135

      PPP

      62

       

      GBPUSD

      GBPUSD

      Spot

      1.17

      Mar 23

      1.10

      Jun 23

      1.13

      Sep 23

      1.16

      Dec 23

      1.21

      PPP

      1.59

       

      USDCHF

      USDCHF

      Spot

      0.95

      Mar 23

      0.97

      Jun 23

      0.94

      Sep 23

      0.92

      Dec 23

      0.88

      PPP

      0.76

       

      EURCHF

      EURCHF

      Spot

      0.98

      Mar 23

      0.93

      Jun 23

      0.92

      Sep 23

      0.92

      Dec 23

      0.91

      PPP

      0.99

       

      EURGBP

      EURGBP

      Spot

      0.88

      Mar 23

      0.87

      Jun 23

      0.87

      Sep 23

      0.86

      Dec 23

      0.86

      PPP

      0.82

       

      AUDUSD

      AUDUSD

      Spot

      0.67

      Mar 23

      0.67

      Jun 23

      0.70

      Sep 23

      0.72

      Dec 23

      0.74

      PPP

      0.68

       

      USDCAD

      USDCAD

      Spot

      1.33

      Mar 23

      1.35

      Jun 23

      1.32

      Sep 23

      1.28

      Dec 23

      1.26

      PPP

      1.19

       

      EURSEK

      EURSEK

      Spot

      10.82

      Mar 23

      11.50

      Jun 23

      11.20

      Sep 23

      10.94

      Dec 23

      10.60

      PPP

      10.09

       

      EURNOK

      EURNOK

      Spot

      10.34

      Mar 23

      10.50

      Jun 23

      10.00

      Sep 23

      9.80

      Dec 23

      9.50

      PPP

      11.23

      Source: UBS, as of 14 November 2022

      Emerging market currencies

       

       

      Spot

      Spot

      Mar 23

      Mar 23

      Jun 23

      Jun 23

      Sep 23

      Sep 23

      Dec 23

      Dec 23

       

      USDCNY

      USDCNY

      Spot

      7.04

      Mar 23

      7.30

      Jun 23

      7.10

      Sep 23

      7.00

      Dec 23

      6.90

       

      USDIDR

      USDIDR

      Spot

      15,517

      Mar 23

      15,700

      Jun 23

      15,500

      Sep 23

      15,300

      Dec 23

      15,300

       

      USDINR

      USDINR

      Spot

      81.3

      Mar 23

      83.0

      Jun 23

      82.0

      Sep 23

      81.0

      Dec 23

      81.0

       

      USDKRW

      USDKRW

      Spot

      1,326

      Mar 23

      1,400

      Jun 23

      1,360

      Sep 23

      1,320

      Dec 23

      1,280

       

      USDBRL

      USDBRL

      Spot

      5.32

      Mar 23

      5.00

      Jun 23

      5.00

      Sep 23

      5.00

      Dec 23

      5.00

       

      USDMXN

      USDMXN

      Spot

      19.40

      Mar 23

      20.50

      Jun 23

      21.00

      Sep 23

      21.50

      Dec 23

      21.50

      Source: UBS, as of 14 November 2022

      Commodities

       

       

      Spot

      Spot

      Mar 23

      Mar 23

      Jun 23

      Jun 23

      Sep 23

      Sep 23

      Dec 23

      Dec 23

       

      Brent crude oil (USD/bbl)

      Brent crude oil (USD/bbl)

      Spot

      93.1

      Mar 23

      110.0

      Jun 23

      110.0

      Sep 23

      110.0

      Dec 23

      110.0

       

      WTI crude oil (USD/bbl)

      WTI crude oil (USD/bbl)

      Spot

      85.8

      Mar 23

      107.0

      Jun 23

      107.0

      Sep 23

      107.0

      Dec 23

      107.0

       

      Gold (USD/oz)

      Gold (USD/oz)

      Spot

      1,777

      Mar 23

      1,600

      Jun 23

      1,600

      Sep 23

      1,600

      Dec 23

      1,650

       

      Silver (USD/oz)

      Silver (USD/oz)

      Spot

      22.1

      Mar 23

      18.0

      Jun 23

      18.0

      Sep 23

      18.0

      Dec 23

      19.0

       

      Copper (USD/mt)

      Copper (USD/mt)

      Spot

      8,375

      Mar 23

      9,000

      Jun 23

      9,500

      Sep 23

      9,500

      Dec 23

      9,500

      Source: UBS, as of 14 November 2022

      Rates and bonds

       

       

      Current*

      Current*

      2023E*

      2023E*

      2024E*

      2024E*

      Spot**

      Spot**

      Jun 23**

      Jun 23**

      Dec 23**

      Dec 23**

       

      USD

      USD

      Current*

      4.00

      2023E*

      4.30

      2024E*

      3.32

      Spot**

      3.85

      Jun 23**

      3.50

      Dec 23**

      3.00

       

      EUR

      EUR

      Current*

      1.50

      2023E*

      2.81

      2024E*

      2.43

      Spot**

      2.15

      Jun 23**

      1.95

      Dec 23**

      1.95

       

      CHF

      CHF

      Current*

      0.50

      2023E*

      1.35

      2024E*

      1.50

      Spot**

      1.07

      Jun 23**

      1.25

      Dec 23**

      1.25

       

      GBP

      GBP

      Current*

      3.00

      2023E*

      4.41

      2024E*

      3.85

      Spot**

      3.37

      Jun 23**

      3.20

      Dec 23**

      2.90

       

      JPY

      JPY

      Current*

      -0.10

      2023E*

      0.11

      2024E*

      0.24

      Spot**

      0.24

      Jun 23**

      0.25

      Dec 23**

      0.35

      * Base rates
      ** 10-year yields (%)
      E = Estimate
      Note: Base rates refer to market pricing.
      Source: UBS, as of 14 November 2022

      Economic forecasts

      GDP growth (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      Developed markets

      Developed markets

      2021

      5.2

      2022E

      2.4

      2023E

      0.4

      2024E

      0.8

      2025E

      2.1

       

      Emerging markets

      Emerging markets

      2021

      7.3

      2022E

      3.8

      2023E

      3.5

      2024E

      4.2

      2025E

      4.3

       

      World

      World

      2021

      6.3

      2022E

      3.2

      2023E

      2.1

      2024E

      2.7

      2025E

      3.3

      E = Estimate
      Source: UBS, as of 8 November 2022

      Americas GDP growth (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      US

      US

      2021

      5.9

      2022E

      1.9

      2023E

      0.1

      2024E

      0.3

      2025E

      2.7

       

      Brazil

      Brazil

      2021

      4.6

      2022E

      2.8

      2023E

      1.3

      2024E

      2.5

      2025E

      2.2

       

      Canada

      Canada

      2021

      4.6

      2022E

      3.0

      2023E

      -0.6

      2024E

      0.3

      2025E

      0.3

      E = Estimate
      Source: UBS, as of 8 November 2022

      Europe GDP growth (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      Eurozone

      Eurozone

      2021

      5.3

      2022E

      3.2

      2023E

      0.2

      2024E

      0.8

      2025E

      1.1

       

      – Germany

      – Germany

      2021

      2.6

      2022E

      1.7

      2023E

      -0.5

      2024E

      0.7

      2025E

      1.0

       

      – France

      – France

      2021

      6.8

      2022E

      2.5

      2023E

      0.4

      2024E

      0.9

      2025E

      1.4

       

      – Italy

      – Italy

      2021

      6.7

      2022E

      3.7

      2023E

      0.4

      2024E

      1.0

      2025E

      0.9

       

      – Spain

      – Spain

      2021

      5.5

      2022E

      4.7

      2023E

      1.4

      2024E

      2.1

      2025E

      1.8

       

      UK

      UK

      2021

      7.5

      2022E

      4.3

      2023E

      -0.5

      2024E

      0.6

      2025E

      1.5

       

      Russia

      Russia

      2021

      4.7

      2022E

      -3.2

      2023E

      -3.0

      2024E

      0.8

      2025E

      1.3

       

      Switzerland

      Switzerland

      2021

      4.2

      2022E

      2.1

      2023E

      0.4

      2024E

      1.0

      2025E

      1.8

      E = Estimate
      Source: UBS, as of 8 November 2022

      Asia GDP growth (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      China

      China

      2021

      8.1

      2022E

      3.1

      2023E

      4.5

      2024E

      4.8

      2025E

      4.6

       

      Japan

      Japan

      2021

      1.7

      2022E

      1.5

      2023E

      1.0

      2024E

      1.2

      2025E

      1.5

       

      India

      India

      2021

      8.7

      2022E

      6.9

      2023E

      5.5

      2024E

      6.0

      2025E

      6.0

       

      South Korea

      South Korea

      2021

      4.1

      2022E

      2.5

      2023E

      1.1

      2024E

      1.7

      2025E

      2.5

      E = Estimate
      Source: UBS, as of 8 November 2022

      Inflation (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      Developed markets

      Developed markets

      2021

      3.2

      2022E

      7.1

      2023E

      3.7

      2024E

      1.9

      2025E

      1.8

       

      Emerging markets

      Emerging markets

      2021

      4.7

      2022E

      9.7

      2023E

      7.0

      2024E

      4.8

      2025E

      4.3

       

      World

      World

      2021

      4.0

      2022E

      8.6

      2023E

      5.6

      2024E

      3.6

      2025E

      3.2

      E = Estimate
      Source: UBS, as of 8 November 2022

      Americas inflation (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      US

      US

      2021

      4.7

      2022E

      8.1

      2023E

      3.6

      2024E

      1.9

      2025E

      1.8

       

      Brazil

      Brazil

      2021

      8.3

      2022E

      9.3

      2023E

      4.1

      2024E

      3.3

      2025E

      3.0

       

      Canada

      Canada

      2021

      3.4

      2022E

      6.8

      2023E

      3.1

      2024E

      1.6

      2025E

      1.5

      E = Estimate
      Source: UBS, as of 8 November 2022

      Europe inflation (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      Eurozone

      Eurozone

      2021

      2.6

      2022E

      8.5

      2023E

      5.3

      2024E

      2.2

      2025E

      2.0

       

      – Germany

      – Germany

      2021

      3.2

      2022E

      8.8

      2023E

      5.4

      2024E

      2.0

      2025E

      1.8

       

      – France

      – France

      2021

      2.1

      2022E

      6.0

      2023E

      4.2

      2024E

      1.6

      2025E

      1.5

       

      – Italy

      – Italy

      2021

      1.9

      2022E

      8.7

      2023E

      6.1

      2024E

      1.9

      2025E

      2.0

       

      – Spain

      – Spain

      2021

      3.0

      2022E

      8.5

      2023E

      3.0

      2024E

      1.9

      2025E

      1.8

       

      UK

      UK

      2021

      2.6

      2022E

      8.9

      2023E

      5.3

      2024E

      2.3

      2025E

      2.1

       

      Russia

      Russia

      2021

      6.7

      2022E

      13.8

      2023E

      4.6

      2024E

      4.2

      2025E

      4.4

       

      Switzerland

      Switzerland

      2021

      0.6

      2022E

      2.9

      2023E

      2.1

      2024E

      1.3

      2025E

      1.3

      E = Estimate
      Source: UBS, as of 8 November 2022

      Asia inflation (%)

       

       

      2021

      2021

      2022E

      2022E

      2023E

      2023E

      2024E

      2024E

      2025E

      2025E

       

      China

      China

      2021

      0.9

      2022E

      2.1

      2023E

      2.0

      2024E

      1.8

      2025E

      2.2

       

      Japan

      Japan

      2021

      -0.2

      2022E

      2.4

      2023E

      1.1

      2024E

      1.7

      2025E

      1.0

       

      India

      India

      2021

      5.5

      2022E

      6.7

      2023E

      5.2

      2024E

      5.1

      2025E

      5.2

       

      South Korea

      South Korea

      2021

      2.5

      2022E

      5.1

      2023E

      3.4

      2024E

      2.1

      2025E

      2.3

      E = Estimate
      Source: UBS, as of 8 November 2022