Investment Strategies

Bonds To Outshine Equities In 2023 – Edmond De Rothschild AM, Brown Shipley

Amanda Cheesley Deputy Editor 14 December 2022

Bonds To Outshine Equities In 2023 – Edmond De Rothschild AM, Brown Shipley

After a tough year in 2022, this week wealth managers Edmond de Rothschild and Brown Shipley released their market outlook and asset allocation for 2023, indicating that the negative factors that impacted markets in 2022 are waning. 

A pair of prominent European investment houses expect bonds to be a wiser bet for investors as 2023 gets under way. 

Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, said 2023 will be the year of bonds more than equities, saying that fixed income markets offer visibility in a context of gradual disinflation. At Brown Shipley, the UK firm is keeping overall equity exposure slightly reduced because it does not think the time is ripe to add more portfolio risk.

Wealth managers are working out the most suitable asset allocation mix at the end of a year that has seen stock and bonds lose ground as central banks have raised rates to combat the highest inflation rates in four decades. 

Edmond de Rothschild's Melman expects the disinflation trend to last for two years and believes that this will lead to greater visibility on the potential of the bond market, especially as yields have recovered.

He said that there are already yields on certain bond markets that are comparable to or exceed the normative assumption of long-term equity market performance of around 7 per cent per year. 

In their fixed income strategies, he favours investment grade credit, financial debt, emerging debt, and high yield with high selectivity bond picking.

Melman highlighted that diversification across assets classes is back. His top megatrend thematics include healthcare which should continue to outperform because the attractively valued sector benefits from structural growth and is not sensitive to the ups and downs of the cycle. 

The Big Data revolution should also continue to offer opportunities and he is convinced that companies will structurally increase their investments in human capital. Melman also expects a mild recession in the US and a more significant one in Europe with a contraction in corporate margins.

Winter chill
This was echoed by Brown Shipley this week in its outlook for 2023, which reflected expectations of a tough winter for the global economy, followed by some reacceleration, and full-year inflation of 6.7 per cent, down from 9 per cent in 2022.

“Equity and bond prices fell simultaneously this year, creating significant diversification challenges,” said Daniele Antonucci, chief economist at Quintet Private Bank, parent of Brown Shipley. “While 2023 promises continued volatility, high-quality bond markets – and especially government bonds – should once again provide defensive benefits, reducing portfolio risk.”

US Treasuries look appealing heading into next year, he believes; it is likely that US inflation has already peaked and upcoming rate hikes will be smaller than in the recent past – with hiking expected to cease by late in the first quarter or early in the second quarter.

“While the macroeconomic outlook is far less rosy in the eurozone and UK, both government and investment-grade bond spreads appear increasingly attractive as inflation is now moving closer to the peak,” Antonucci said. “Emerging-market hard-currency sovereign bonds suffered in 2022, but valuations are also now compelling, especially relative to US high yield,” he continued.

The firm has increased its exposure to US government bonds and maintained its exposure to its emerging market sovereign bond position which it believes faces tailwinds in 2023. 

For the equity markets, Melman said he is neither optimistic nor pessimistic, saying he had never seen a recession without a negative impact on the equity markets. 

Historically, the best entry points have been at the heart of the recession, Edmond de Rothschild said, but it believes patience is needed before increasing exposures.

In view of US policy stabilising and the likely normalisation of Chinese economic policy, the firm believes that emerging equities, after a long period of underperformance, have the greatest potential for a rebound. US equities, to a lesser extent, should perform well, the firm continued. 

Meanwhile, European equities, unlike US equities, were able to take advantage of the very sharp increase in interest rates in the United States via the appreciation of the dollar, which boosted the profits of these high export companies, the firm said. European equities should also benefit from the gradual normalisation of the Chinese economy which the firm expects in 2023, though they will remain sensitive to the energy crisis and developments in the conflict in Ukraine.

Meanwhile, Brown Shipley believes that US and emerging markets will outperform the euro area. The firm is keeping its overall equity exposure slightly reduced as it doesn’t believe it is time to re-risk its portfolios yet. 

“We maintain our conviction that eurozone equities have not yet fully priced in deteriorating economic conditions. By comparison, emerging-market valuations appear attractive. We anticipate that China will reopen and stimulate its economy in 2023, supporting emerging markets, which will receive a further boost from a slight weakening of the US dollar,” said Cyrique Bourbon, head of portfolio strategy at Quintet Private Bank.

The firm maintains its preference for emerging market equities and reduced its exposure to eurozone equities, while adjusting its allocation within the US market, adding to high dividend and low volatility equities. It has also reduced its dollar cash exposure, as it predicts a slightly weaker dollar in 2023. It continues to hold gold as a strategic hedge at a neutral level relative to its long-run allocations.

Its investment philosophy is to look for companies with superior quality and growth, and it believes that its direct equities are well positioned for the medium to long-term. 

It also believes that companies with better ESG credentials should generate better results. The firm's top 15 equity holdings include Microsoft, Apple, Tesla, Amazon, Proctor & Gamble as well as Pepsico and Coca Cola. 

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