Not another 2023 outlook …

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It’s that time of year. I’m pretty skeptical of market outlooks, generally they either end up being a nowcast, or get thrown out before the ink has dried (see: 2022 forecasts), or they reiterate a bland consensus which isn’t useful or they are too vague or they tell you more about the forecaster than anything else. I share a lot of Howard Marks’ excellent criticisms of forecasts.

but hey, I ENJOY reading a forecast as much as the next guy and occasionally you do learn something from reading a bunch of them next to each other. So given it’s ** that** time of year, shall we dive in?

Here’s the short, slightly abridged versions of five big name forecasts.

First up we have Morgan Stanley:

Stock market could go up down or sideways, but probably sideways. Bonds yield good.

(as much as I am saying this with a snarky tone, it’s probably one of the more sensible forecasts I’ve ever seen – THEY ARE TELLING IT LIKE IT IS HERE!)

And here’s exhibit A in Morgan Stanley’s “yield is good” argument. Solid 6% returns on offer, the yields on this basket have hardly ever been as good in most working lifetimes.

Next up, Goldmans who are also in the “stocks sideways” camp. Let’s call it the “all the zeros” forecast: They see no US recession, no earnings growth and no overall stock market returns for the calendar year. A hard landing would be worse than a soft landing (I love these kind of insights).

I think a swoosh is the technical term for this forecast.

Now, JP Morgan (link). The tl;dr – expect a recession next year but markets have already priced it. Bad for economies, good for markets. And bonds are good.

The big question – it all depends on whether inflation keeps coming under control IF it does then JPM sees major Central Bank’s peak rates in sight as follows:

Fed: 4.5-5% Q1 23

ECB: 2.5-3% Q1 23

BoE 4-4.5% Q2

Karen Ward from JP Morgan explained this all really clearly when we spoke to her on the podcast.

So then the next big question is earnings. So far, expectations have only fallen back ~5% from highs , that’s not a recession a recession looks like 10-20% fall BUT has the market got ahead of this? JP Morgan thinks so. Markets do move ahead of earnings forecasts, and can even rally on falling earnings like in the early 90’s.

Now in an ideal world I reckon that Expected Return ought to be the new macro outlook. That’s what actually matters and it’s also what most investors really do care about. And it’s been pleasing in recent years to see more and more asset managers share their expected returns (or Capital Market Assumptions if you want to sound posh – always good to find an impressive sounding name for a bunch of made up numbers) and by sharing these numbers along with macro outlooks they are actually aligning more with how their clients think or ought to think and hopefully, triggering some slightly better investment behaviours than the usual “market go up / market go down” stuff.

And in fairness to JP Morgan their outlook comes hot on the heels of their latest expected returns [link]. This makes the simple point that expected returns are in fact, great from here, pretty much across the board. Just look at this chart of how the whole efficient frontier has just shifted up about 3-4 whole percentage points in return space. Forget 2023 outlook, the future looks great for long term investors. Expected return on balanced portfolios jump from 4% to 7% per year, say JPM.

A counter to the inflation-under-control thesis comes from Research Affiliates Rob Arnott [link] who is not really making a macro forecast but simply makes the historical point that when inflation hits certain thresholds, it takes years to come down. Yes, maybe it’s different this time, but base case from history ought to be years of higher inflation.

Rob’s work features this excellent chart which rather tells the story of 2022 where the Fed has been permanently behind on inflation.

Source: Research Affiliates

Research Affiliates also have an excellent interactive tool that does expected returns for tonnes of asset classes in various currencies using different models. They have global equity at a stonking 10% p.a. and a 60:40 at 7.5% p.a.

This unearths some useful insights, particularly in highlighting emerging markets and the UK as stock markets that have higher than average expectations for future returns ( technical point that it depends a bit on whether you use an expected returns model that incorporates valuation or not, but broadly that stands either way). JP Morgan are making the same point about higher expected returns in emerging markets in their piece.

The one huge caveat to this is that emerging markets and UK have been highlighted for pretty much the whole last decade as higher return opportunties, and it’s yet to materialise.

The folks at GMO [link] also have something to say about expected returns. And their 7-year expected returns forecast also picks out emerging markets and non-US stocks as places to be. And after a decade of being perma-bears (and it has to be said, wrong), they are actually pretty positive on the returns outlook.

Now let’s do Blackrock, they say: A recessison is coming and the damage is not yet priced. And be prepared to keep getting surprised by inflation. Their solution is unconvincing: You’ll need to invest more actively (hmm, didn’t see that one coming).

Blackrock also highlight some useful (if obvious, and somewhat vague) long term themes around aging workforces, the low-carbon transition, infrastructure and the role of geopolitics – JP Morgan also highlight some of these.

And they sneak in an important point about private markets – valuations in the unlisted/private space have not fallen anywhere near as much as public markets this year (call it “return smoothing service”) so that actually makes them an unattrative area to deploy into now. If you can realise your money at those valuations (in an open ended fund, say) you probably do want to do that and re-deploy into public markets.

One chart I’d pick out here is my favourite “medusa” chart which just shows how wrong forecasters have been on inflation. Should put a dose of humility into all of this outlook stuff, really.

So, what did we learn?

Well I think this quick slightly snarky canter through the highlights of these outlooks does help flush out some of the key questions to think about next year:

Inflation, interest rates, recession and stockmarket earnings are the key things, the answers to these questions will drive the next year or more, but are they already priced? that’s what matters, and it’s the hardest question.

Longer term, there’s been a vast shift in future returns and some pretty simple, low risk investment approaches could actually be pretty great. Investment grade bonds, short dated, for example.

Recession or not, stocks are set for pretty good long term expected returns of 8%+ per year, so maybe it’s not all about picking bottoms as the macro outlooks would have us believe. But one concern with the expected returns forecasts is they are all suspiciously clustered together, implying far more certainty than actually tends to exist. Also a long-term return that changes so much over a short period of time is just a bit, uncomfortable.

Longer term there’s a bunch of massive themes that will probably really matter: demographics, climate, energy transition, a more fractured global world and geopolitics but honestly who really knows how to factor these into an investment process. They sure sound like they could be bad, but you’ve got to set it all against long-term return expectations and long-term stock market history which is pretty good.

Maybe the biggest question about all of this is do we invest any differently based off what’s in these outlooks? Has the world REALLY changed, are we in a new era? And of course, so much of the funds industry is biased to shout YES, yes you should do something differently, and so much of the time the answer is that you probably don’t need to. This year a lot has objectively changed though, so if there is one thing to do differently which comes through from the outlooks its more a “back to basics” type viewpoint – short dated bonds look great so a lot of the private market and alternatives trend of the last decade looks a bit unnecessary.

And finally, there’s a good chance this is all way off, so great as they sound, don’t get too attached to any of these outlooks

Hoped you found something useful here. If you liked this please check out my newsletter where I’m sharing similar thoughts and insights on a fortnightly basis.

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