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Macroeconomic risks have shifted from inflation to growth with some dollar weakness expected against other fiat currencies.
An Investment Strategy update from Lombard Odier said the bank was expecting US consumer resilience to falter and that there would be recession risks in late 2023 and early 2024.
Interest rate cuts are likely to be a story for 2024, the bank said in the update, adding that it expected dollar weakness against the euro, the Swiss franc and Japanese yen, and strength against the Chinese yuan.
The bank said in Europe, near-term growth prospects remain unimpressive, while China’s strong domestic demand should help it achieve real GDP growth of 5.5% in 2023 despite weakness in overseas demand, real estate and industrial sectors.
Of Japan, the bank said its economic fundamentals look healthy, with inflation now sustainably above target, and it was expecting the Bank of Japan to end its policy of yield curve control in 2023.
Lombard Odier said with interest rates expected to remain high, it was seeking to build resilient investment portfolios, with neutral exposure to risk assets that can perform under a range of economic outcomes.
“We lean towards fixed income, with a preference for US Treasuries and investment grade credit and see selective opportunities to earn attractive carry in emerging market debt,” the bank said, adding: “In equities, we prefer quality stocks, defensive businesses, and non-US markets, which offer some valuation cushion as earnings downgrades unfold.”
In the US, Lombard Odier said the country has staved off recession fears to date, but restrictive monetary policy which will stay in place throughout this year will make a mild recession likely at the end of the year.
After last year’s energy crisis in Europe, it is no longer a key concern, but inflation is persistent enough to push the European Central Bank into an increasingly restrictive monetary policy.
In the UK, high inflation and increasing central bank interest rates are yet to take effect on many mortgage borrowers who will be coming off fixed rate deals and face much higher repayments.
Meanwhile, in Japan, there may be a snap election to justify potential revenue enhancement measures, but this is unlikely to change policy for now.
Finally, in China, additional tweaks to monetary policy are expected to anchor growth after the reopening boost fades, with the stance of the new financial regulator a key factor to watch, the bank said.
(Reporting by Imogen Lillywhite; editing by Brinda Darasha)
