Uncertainty, recession, flight to safety: what will 2023 bring to financial markets?

The bear market rally that started in mid-October has come to a halt by December and uncertainty once again took hold of financial markets in the last month of the year. The largest central banks continued to tighten monetary conditions in December, leading to further increases in bond yields and the weakening of stock markets. What does the new year hold in store for investors and speculators?

Some analysts believe that 2023 will bring a turnaround in inflationary trends and bond markets may start to see a decrease in yields, first in developed markets, followed by emerging market economies. Such a scenario will offer good entry points in the market of longer-maturity bonds.
A sustained stock market recovery will probably take a longer time to materialize, and with the strengthening of recession-related fears, the new year may bring further exchange rate losses, since the risk of a significant, double-digit profit-recession is currently not priced in on most stock markets.
Some experts believe that a cautious increase to stock exposure may be warranted in the medium term, as the decrease in US inflation and the bottoming of the employment data may trigger a rise in investor sentiment and risk appetite. Those in the opposing camp say that it makes more sense to wait until there is a more pronounced break in inflationary trends and/or until the central banks’ hawkish communications turn softer. Experts at JP Morgan think that stocks will continue their slowdown into 2023. “This proverbial snowball should continue to gain momentum next year as consumers and [companies] more meaningfully cut discretionary spending and capital investments,” according to the firm’s 2023 markets outlook.
Volatility is here to stay and rollercoaster-like movements could stay high in the months to come amid the threat of a recession, slower interest rate hikes and an economic reopening in China, economists at Charles Schwab wrote this month.
At a sectoral level, shares of traditionally defensive sectors such as the pharmaceutical or food segments can outperform in a more uncertain environment, as demand for these products is stable even in a worse economic environment, according to KBC Asset Management.
Hungarian financial assets close a turbulent year. The forint and stocks came under heavy pressure toward the end of 2022; however, news about an agreement on EU funds brought a sigh of relief to markets. The willingness of the two sides to reach a compromise (or at least the appearance of it) was a relief to investors, and so was the fact that Brussels accepted the Hungarian recovery plan and a smaller-than-expected part of the cohesion funds was finally suspended. Nevertheless, the EU has put in place tough conditions for Hungary in exchange for the funds, so there is a long way to go before Budapest is granted access to this money, stressed analysts at OTP Bank. In addition, Hungary’s current account deficit and inflation data continue to increase.

Flight to safety
Hungarian portfolio managers see the near future in the capital markets as uncertain and many prefer safer money market instruments to shares. Within sample portfolios, Hungarian government bonds continue to hold their significant, but slightly decreasing advantage, followed by money market investments in second place, and then international bonds. The various categories of stocks are still only at the end of the line.
Given the international inflationary backdrop, experts at Raiffeisen Bank Hungary recommend holding real assets and underweighting bond-based investments in a well-diversified portfolio.
At OTP, asset managers park almost half of their portfolio in money market instruments offering the highest current nominal yields - hoping and wishing for a peaceful and successful new year.