According to Morgan Stanley Research’s 2023 market Outlook, investors might experience some whiplash in 2023 when inflation and some of 2022’s other dominating market trends completely flip. According to the market strategists at Morgan Stanley, the economy is proving to be too resilient, forcing the ‘looming collapse’ in earnings to remain elusive for yet another quarter.
Morgan Stanley predicts a resilient 2023 market
A combination of unusual occurrences in 2022 weakened asset prices across all markets. Investors have rarely encountered the lessons provided by a global economy just beginning to emerge from a pandemic. In addition, there are extraordinary monetary policy measures and a huge land war in Europe.
Consensus opinion suggests that early in 2023, earnings would plummet, dragging the stock market with them. Morgan Stanley believes that investors will have the elements for a successful first quarter if ongoing improvements in inflation are included.
Specifically, Morgan Stanley is decreasing its exposure to mega-cap stock companies. In addition, they have shifted their attention to overseas markets. Late in September, when the dollar peaked, non-U.S. markets began to outperform U.S. markets.
Asia ex-Japan has led since the end of October, outperforming Europe and Japan, which have both outperformed the U.S. As China’s zero-COVID policies begin to moderate. Combined with a weaker dollar, that could make China an intriguing equity area for 2023.Morgan Stanely
Fed policies to harm the market further
In 2023, according to Morgan Stanley, monetary policy will remain the primary driver of asset prices. The Fed’s monetary policy has the ability to reduce earnings, heighten default risks, expand credit spreads, and enhance the likelihood of a recession.
Morgan Stanley anticipates a moderate recession since the labor market will likely stay robust. Simply put, it is difficult to anticipate a severe recession with such a vibrant job market. However, difficulties are ahead.
With peak inflation likely behind us, high-quality bonds may benefit, while riskier assets and lower-quality credit may suffer. However, if the Fed’s plan to durably stem inflation works, asset valuations may benefit over the longer term. Be nimble and prepared to adjust investment positions as events unfold in 2023.Morgan Stanely
In addition, the Fed’s shift to a less aggressive monetary policy will likely set the tone for markets in 2023. If this happens, high-quality spread assets like agency MBS and securitized debt, U.S. duration, and emerging markets debt are positioned to do well. In conjunction with a major slowing of the U.S. economy, these experts anticipate that inflation will continue to decline.
Emerging markets to expand beyond China
In 2022, Emerging Countries including Brazil, Mexico, India, Indonesia, and the GCC (Gulf Cooperation Council) beat both the MSCI Emerging Markets Index and the S&P 500 Index. This outperformance is due to a combination of variables. These strategists believe that the headwinds of the past are becoming tailwinds that will provide support for many years to come.
According to Morgan Stanley, China’s growth will be hampered by its heavy debt, decreasing working-age population growth, and diminishing contribution from international trade. They anticipate the next decade will be dominated by green technology and science-based businesses, such as semiconductors, artificial intelligence, and high-end manufacturing.
In 2023, when pandemic-related pressures begin to subside, global rebalancing may be the primary market driver. Morgan anticipates three major rebalancing factors: labor markets, the energy crisis, and China’s structural reform shift.
Morgan Stanley calls for ESG disclosure and responsible investing
Major events in 2022 have caused a shakeout in the responsible investment industry that will bring meaningful change into 2023 and beyond. The crypto market and the DeFi industry at large have led global markets in theft, hacks, bankruptcy, and market greats turning into financial villains.
For years, responsible investors have propelled companies to increase transparency and disclosure of their ESG performance across factors ranging from carbon emissions to workplace diversity. Now it is critical that responsible investment asset managers provide transparency into their own research methodology. Investors need clarity around the linkages between corporate ESG performance, financial outcomes, security selection, and the results of corporate engagement and activism.Morgan Stanely
This too shall pass
While macro factors may be influencing performance over the short term, Morgan Stanely continues to be focused on the fundamentals of its portfolio firms and their long-term compounding potential. In their perspective, equities will likely outperform over the long term because they provide ownership in the creativity, intellect, and output of hundreds of thousands of talented workers.
Morgan Stanely feels that a greater cost of financing will result in fewer market entrants and reduced competition, which should be advantageous for businesses that have already created valued businesses and brands.
The financial entity has reduced exposure to cyclical segments exhibiting undesirable asymmetric risk/return characteristics. They choose defensive sectors that are trading above historical averages. Morgan Stanely is ready to enhance risk in a disciplined manner when spreads reach defined criteria. Here are some market prospects to look out for.
As indicated by the inverted risk-free yield curves, the markets anticipate a recession in 2023. With employment staying robust, though, nominal growth is anticipated to be positive. In addition, given the relatively robust consumer balance sheets supported by the fiscal stimulus under COVID, M.S. anticipates a “different” recession in which default rates do not surge.
The corporation anticipates that companies will approach 2023 with defensive business structures, solid liquidity, and streamlined manufacturing costs as a result of COVID-era efficiencies. In addition, they anticipate a reduction in leverage that takes into account the threats to business profitability in 2023.