The bank, like many of its peers, is wondering at what point to start going into "risk assets" again once there is more clarity about when interest rates reach a peak as central banks fight inflation. The Swiss firm outlines some of its predictions for 2023.

There is a chance for investors to put more chips on the table as the months go by next year once real interest rates peak, according to Lombard Odier in a series of 10 predictions for 2023.

In its first prediction, the Swiss private bank is underweight risk assets.

“We maintain a cautious stance as we enter the first phase of 2023. We favour quality across asset classes. In equities, we like companies with low earnings volatility and better ability to maintain margins,” Stéphane Monier, chief investment officer, said. 

“In fixed income, we prefer investment grade over high yield debt, and in currencies, we prefer havens from risk, such as the US dollar and Swiss franc. We are overweight cash, which enables us to stay nimble and seize investment opportunities as conditions improve,” Monier said. 

The other nine points for 2023 are:

1,  Phase One, pre-pivot: Until real rates peak, Lombard Odier remains moderately cautious; 

2,  Underweight risk assets for now; 

3,  Prefer quality and diversification across asset classes; 

4,  Asymmetric return profiles; 

5,  Seek diversification through alternatives’;

6,  US dollar strength to continue; 

In the second phase, once real rates have peaked; Lombard Odier adds risk to portfolios, adopting a moderately optimistic stance:

7,  Gold’s appeal to increase; 

8,  High yield credit will become increasingly attractive; 

9,  Equities to present a buying opportunity; and 

10, Emerging market equities and local currency bonds.

“2023 may divide into two distinct phases. The effects of tighter monetary policy, high inflation and slowing growth will carry into 2023, demanding prudent portfolio positioning. However, once real interest rates peak, the economic cycle will pivot, creating opportunities to raise allocations to risk assets,” Monier said. 

“That will only happen once the Federal Reserve halts its interest rate hikes. The central bank is entering a new phase in its monetary cycle by slowing the pace of tightening as inflation declines slowly from four-decade highs. A higher peak in interest rates will accompany a probable recession late in 2022 and into 2023. The resilience of the American job market will be key to the shifting pace of monetary policy,” he continued.

“In Europe, consumer prices remain largely driven by energy. The continent’s decoupling from Russian sources is having deep economic and geopolitical consequences. Much now depends on the severity of the northern hemisphere’s winter, but gas inventories have been replenished,” he said. 
 

China
“China is a potential source of growth in 2023. Its exports remain an essential component of global supply chains and we see the authorities gradually shifting their Covid strategy to re-open the economy,” Monier continued. “The recovery of the Chinese real estate sector will be another precondition for economic expansion. However, international trade patterns continue to evolve in a more fragmented world, as corporations make their supply chains more resilient through ‘friend-shoring.’”

“The main risks for global growth remain overly restrictive monetary policies, which would worsen the affordability of housing in developed economies. The war in Ukraine retains the potential to inflict further damage on energy markets and on Europe in particular. Any further delay in re-opening the Chinese economy would weigh on global growth, and we cannot rule out further geopolitical tensions over Taiwan,” Monier said. 

The bank also flagged a range of key events slated for 2023: 

-- 7 January: Global population scheduled to reach eight billion people; 

-- 15 to 20 January: World Economic Forum, Davos, Switzerland; 

-- 5 March: National People’s Congress, Beijing, China; 

-- 19 to 21 May: G7 Summit, Hiroshima, Japan; 

-- 18 June: Turkish general election; 

-- 9 to10 September: G20 Summit, Delhi, India

-- 22 October: Swiss federal elections;  

-- 29 October: Argentine general election; and 

-- 6 to 17 November: UN Climate Change Conference (COP28), Dubai, UAE.