Christian Nolting, global chief investment officer of Deutsche Bank International Private Bank, discusses the economic and investment outlook.

Despite slower estimated economic growth in 2023, financial markets could prove more resilient this year than they have been in 2022, Christian Nolting chief investment officer at Deutsche Bank said this week.

According to Nolting, central banks and investors are likely to find 2023 easier. He forecasts that inflation will ease down, but stay well above central bank target levels.

He also believes that 2023 is likely to be an acceptable year for equities, but not a great one. “Positive returns will be driven by some modest price/earnings expansion and dividends – but earnings per share will be stagnant. In this calmer environment, relative regional valuations may become more important,” he said in a statement.

Nolting also thinks that continued domestic stimulus will eventually succeed in turning its economy around: “Chinese recovery, combined with regional reopening, means that Asia could have a good 2023.”

His statement came in challenging times as banks and investment firms are trying to forecast whether interest rates have almost peaked or not, if inflation will get back down to predicted levels or if the war between Ukraine and Russia, which puts immense pressure on energy supplies, will continue. 

In a world that remains intrinsically risky, here are Nolting’s 10 predictions for 2023.

Growth: stop and go
With recovery starting in the second quarter, economic growth for 2023 is likely to be 0.3 per cent. The main risk factor remains energy, coupled with a possible shortage of gas in the winter of 2023/2024.

If inflation rates continue to decline and there is no need for robust Fed intervention, the US economy could return to growth in the second half of 2023, finishing the year overall at +0.4 per cent.

Economic momentum in China is likely to be much stronger next year. Nolting is expecting growth of around 5 per cent in 2023 after an estimated 3.3 per cent this year. 

Inflation: lower and higher
While inflation seems to have already peaked in the US, Nolting said that it might not peak in Germany and the eurozone until February or March 2023.

Overall, the world’s main central banks are therefore likely to keep their monetary policy relatively tight initially. Current capital market pricing reflects this. But there is still a risk that inflation will go higher than expected, requiring central banks to intervene more strongly.

Bonds: approaching equilibrium
2023 will give bond market investors no cause to relax. On the other hand, high quality bonds offer decent yields again which could compensate for the risk of further rate rises. The ongoing hit from inflation and interest rate rises has been too severe for the situation to calm down quickly, but valuations look more favorable now.

FX: King dollar – turnaround
Following the winter, growth in the eurozone and particularly in China should pick up again. This could weaken the dollar and lift the euro, Nolting said. 

Stocks: from TINA to TAPAs?
In regional terms, one investor focus in 2023 could be Europe. Recent valuation discounts in this region have been disproportionately high, with economic and geopolitical risks already factored in. Extensive fiscal programs and high levels of savings should buoy private consumption, and expected stronger Chinese growth will be important to many European companies. The US stock market will, of course, remain the focus, but its technology bias, and the resulting greater sensitivity to interest rate movements, may lead to greater investment risks, as could the expected weakening in the dollar.

Among the emerging economies, Nolting believes that Asian markets remain the most attractive. Strong capital flows to “safe havens” caused marked declines in valuations in northern Asian markets, such as South Korea, Taiwan and China in 2022. The average drop in these markets was around 20 per cent, a trend that has now been partly reversed. These markets may make a comeback when the macroeconomic environment and investor sentiment improve.

Stocks remain an essential component of a diversified portfolio, Nolting said. Decent overall price gains are expected in 2023, but with periods of possible substantial volatility.

Infrastructure: the best is yet to come
Governments worldwide are seeking to expand their infrastructure with large amounts of investment. Nolting estimates that the market for listed infrastructure investments alone is currently worth approximately $7 trillion. 

Alternatives: if you don't like beta, try alpha
In particular, investors hope that alternative investments will improve the diversification of their portfolios, deliver reliable and high absolute returns and provide a certain degree of protection against inflation.

Risks: known unknowns
The major risks in 2023 will be familiar ones from previous years: geopolitics, the fight for global technology leadership, the Covid-19 pandemic, China’s real estate market and a sell-off in the bond market.

Asia: hope in the Year of the Rabbit
Many Asian markets that were hard hit in 2022 are hoping for a comeback with an improved macroeconomic environment and, by extension, improved investor sentiment in the Year of the Rabbit. 

ESG: energy transition – climate is macro essential   
Global energy transition success is essential to continued development but it must be seen as being fairly implemented.