A Critical Look at the Global Macroeconomic Environment in 2023

Key Takeaways

• 1. Citi’s Chief Investment Office predicts a 70% chance of recession in 2023.
• 2. The US Federal Reserve is intent on crushing domestic inflationary pressures, but it comes at a cost.
• 3. Investment grade, quality fixed income is an area identified to help with capital preservation for the current environment.

The US Federal Reserve has been raising interest rates at never-before-seen levels, the impact of which will most likely send the US and global economy into a recession next year. Citi is now looking at a 70% chance of a recession in the United States in 2023, up from 50% mid 2022.

Given the above macroeconomic backdrop, Citi’s Chief Investment Office (CIO) believes the priority should be capital preservation and increasing high-quality fixed income in portfolios.

Investors may consider US Treasuries, investment-grade bonds, municipal bonds and notes, and preferred securities. Overall, US bond yields now exceed US equity dividend yields

Figure 1. US bond yields now exceed US equity yields.

Our macro-outlook suggests the next six months of equity returns remain highly uncertain. Sectors with defensive factors, such as global pharmaceuticals and IT software are outperforming the market.

Figure 2. Dividend growers are outperforming

China presents a different story from the rest of the world.

China is the sole large economy easing monetary and fiscal policy, seeing rising growth, and presenting historically low equity valuations – all likely to continue into 2023.

Citi’s CIO forecasts that China’s real GDP will grow by 4.5% in 2023, way ahead of other economies with GDP forecasts of the US (0.7%), EU (-0.5%), and the UK (-0.2%).

Looking beyond these indicators, here are five signs of China's recovery:

• 1. Policy Support, both fiscal and monetary, to become clearer and stronger as a new political economy cycle begins.
• 2. A potential end to the pandemic seclusion.
• 3. Further support to the property sector to restore sentiment and demand.
• 4. Accommodative monetary policy that contrasts with developed countries.
• 5. Low valuations and improvement in earnings will continue to support equities.

On the equities side, our macro-outlook suggests that the next six months of equity returns remain highly uncertain. With the market pricing an elevated cost for buying protection out over the next year or two, this creates potential opportunities for suitable investors to earn a fixed coupon or use those funds to strategically accumulate positions in equities if dips occur. Of course, risks include loss of principal or changes to issuer credit quality, which should be understood before considering any strategy.

Citi believes markets will remain volatile into the year-end, with a “bottom” becoming visible by the end of 2023. Our analysts remain defensive in the near term and, at the same time, are looking for opportunities to build positions in sectors that could become oversold.

Read the full version of this article which originally appeared on 5 October 2022 on Citi's Asia Wealth Insights page.

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