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More bear legs ahead of hard landing, Robeco

While inflation, rates and the US dollar are peaking, we’re not quite there yet. Dutch quant house Robeco is tipping better returns for investors in 2023 but only after markets tumble further over the coming months.
Analysis

“The last leg of a steep climb towards the peak can prove treacherous and markets tend to overshoot here. That implies short-term pain as exhaustion and capitulation take hold, following an already dismal performance across the multi-asset spectrum,” Robeco said in its 2023 investment outlook paper.

“While cash levels among retail investors are historically elevated and professional investors are moving towards a consensus of a US recession in 2023, we haven’t seen full capitulation in risky assets yet.”

Before sinking to the floor, however, markets will likely experience strong “countertrend rallies” as hope scrambles against gravity.

“We expect the last leg of the bear market cycle to emerge in 2023,” the outlook says. “This will bring the dislocation in assets that will deliver long-term gain, given the asymmetric risk-reward pay-off that will emerge.”

Emerging markets (ex China) equities, in particular, should offer good value next year, Robeco says, while a post-capitulation environment “will likely create very good entry points for long duration in fixed income, followed in time by decent troughs in risky fixed income and equity markets”.

Colin Graham, Robeco head of multi-asset solutions (photo at top), dismissed the narrative of any central bank-engineered ‘soft landing’ for economies next year as “flawed”.

“Instead, we expect a hard landing. Moreover, as recessions tend to be highly disinflationary, we believe this will take the sting out of inflation,” Graham said. “Once the three peaks in inflation, rates and the US dollar have been reached, 2023 will ultimately contribute to significantly better returns across all major asset classes.”

The Robeco analysis says earnings-per-share ratios could drop as much as 30 per cent next year as the new tight money reality sets in with investors finally repricing assets to match. Despite a relatively tough year or so for sustainable investment strategies, dented by outperforming energy markets and a political backlash in the US especially, the report says the style is “here to stay”.

Rachel Whittaker, Robeco head of sustainable investment research, said the environmental, social and governance (ESG) sector is on track for faster growth compared to the broader funds market.

“Additionally, greater societal awareness of sustainability challenges is leading more investors to align their portfolios with their values, while the growing range of sustainable strategies available is making it possible for more investors to target both sustainable and financial goals,” Whittaker said.




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