(Source: Merlea Macro Matters)

Summary

While a global recession in 2023 cannot be ruled out, it is not the most widely anticipated outcome at this time. While tightening of monetary policy typically involves increasing interest rates, which can slow down economic growth, central banks are expected to proceed gradually and with caution. They are aware of the potential impact of tighter monetary policy on the economy and will likely take steps to mitigate any negative effects.

Given continued underlying inflationary pressures, monetary policy is likely to remain restrictive throughout most of 2023. This will act as a break on economic activity and will likely lead to increases in unemployment rates in various economies, particularly in Europe and the US.

Additionally, the current outlook for the global economy is generally positive, with most countries experiencing growth and low unemployment rates. The rollout of vaccines has allowed for the reopening of businesses and the revival of consumer spending, which has helped to boost economic activity. It is also important to note that central banks’ primary objective is to maintain price stability and ensure the stability of the financial system. They will likely take a balanced approach, considering both the need to control inflationary pressures and the need to support the economy.

While the inflation news is encouraging, the fight is far from won. Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries.

Many countries responded to the cost-of-living crisis by supporting people and businesses with broad and untargeted policies that helped cushion the shock. Many of these measures have proved costly and increasingly unsustainable. Countries should instead adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy.

The battle against inflation is ongoing and is likely to continue in the future. Inflationary pressures can arise from a range of factors, including changes in consumer demand, economic growth, labour market conditions, and supply-side factors, such as changes in commodity prices or advances in technology. In addition, there are challenges posed by the global economy, including persistent headwinds to growth, increased protectionism, and geopolitical tensions, which can impact the effectiveness of central bank policy and complicate the battle against inflation.

Bonds

The price of money. The cost of capital. Call it what you will but it is the primal force that shapes our world. In the space of just nine months, we’ve reverted to interest rates not seen for the best part of a decade as this graph below shows. The pace may slow next year, but if inflation becomes more entrenched, a gradual lift in interest rates over the next few years is unavoidable.

Usually portrayed as a cause for alarm, higher interest rates aren’t necessarily an evil. But adjusting to the bold new world won’t be easy, particularly for a world awash with debt.

Monetary policy has likely already reached restrictive levels in several major economies. While nominal DM overnight rates are still below inflation, that is likely to change as inflation moderates and central banks reach points where they pause their hiking cycles. If inflation continues to weaken and bond yields fall in the first quarter of 2023, it could be a positive outcome for financial markets, although it depends on the context and other factors at play.

The U.S. Federal Reserve (Fed) will release a new set of economic projections at its March meeting, but we don’t expect a downshift in its projections for the fed funds rate given the recent strong job data. Fed officials have repeatedly cited the tight labour market as a worry and have continued to emphasise that they will keep monetary policy on a tightening path until inflation is heading back down to its 2% target.

We think the Fed may need to reach a roughly 5% nominal federal funds rate, which is already largely priced into markets and reflected in the Fed’s own projections. Estimates put the real neutral interest rate in Europe well below other DM rates, suggesting the European Central Bank (ECB) has less work to do. We think a 3% rate, or slightly higher, where the ECB pauses is a reasonable estimate, given the Euro area is likely close to if not already in a recession.

Higher bond yields dull the relative appeal of stocks while raising companies’ borrowing costs. Higher Treasury yields can also weaken the valuations of equities in standard valuation models, particularly for tech and other companies that rely on future profits that are discounted at higher rates when yields rise. The equity risk premium, or extra return investors expect to receive for holding stocks over risk-free government bonds, has become less favourable over the past week.

In the short term, we see a rebound in yields as an opportunity for investors who have been hesitant to invest in intermediate-term or longer-term bonds. Over the long run, we expect inflation to continue to fall in response to the monetary tightening that’s already in place. Disinflation is already occurring in the goods sector. It will likely spread to the service sector.

We still believe fixed income will produce positive returns in 2023. However, there will likely be a fair amount of volatility along the way. We should expect more surprises but suggest that investors looking to lock in higher yields for the next few years consider using the expected rebound in intermediate- to long-term rates to add to duration to their portfolios.

Listed Property

With interest rates in Australia forecast to rise by another 50 to 100 basis points, it would be fair to assume another tough year for real estate investors. However, historical data suggests that during the last 7 RBA tightening cycles (interest rates increasing), Australian listed REIT’s have returned on average 7% p.a.

To decipher the above data, we need to think about what causes the RBA to increase the cash rate. It is an environment with low unemployment rates, wage growth and increased consumer spending, pushing inflation higher. With rents mostly tied to Consumer Price Index (CPI), revenues will increase during the cycle and stay at these new elevated levels once interest rates stabilise. Combine this with declining gearing rates, 27.5% average compared to 46% 15 years ago, then REITs are set to benefit once interest rates peak.

Research undertaken by Oracle Advisory Group has taken the past 30 years of RBA cash rate data and overlaid that with the 30-year performance chart for the S&P/ASX 200 A-REIT Index (XPJ Index). While it would be fair to assume a negative correlation between cash rate movements and A-REIT returns, the chart above demonstrates that interest rate movements don’t always drive real estate returns.

There is talk and worry that property valuations will be revalued lower this year. As interest rates rise, capitalisation rates (cap rates) on property increase. The cap rate is essentially the discount rate used in the property sector to value the expected future cash flows from the asset. Higher cap rates result in lower property values as investors expect a higher return on their capital.  To explain further, investors can now receive higher risk-free returns from Government bonds, as interest rates have increased. Investors then expect higher yields from REITs (and other investments) as they are taking on risk. This can push property valuations down, increasing yields. It is expected that cap rates will increase in 2023 across the REIT index, however there are some sectors that will be more affected than others.  For example, office REITs may see valuations decline due to subdued leasing activity as hybrid working takes hold. On the other hand, REITs that specialise in healthcare and non-discretionary retail will have relatively stable cap rates as landlords can increase rents in line with CPI.

We feel that long dated government bond yields could be close to reaching their peak. Broker consensus is that Australian Government bond 10-year yield will remain at similar levels over the next two years. Bond markets have priced in expected further RBA cash rate increases and there is a chance the RBA starts cutting the cash rate in late 2023 as the global economy slows, putting downward pressure on government yields. If yields fall, this would be a tailwind for REIT performance.

When considering investing in REITs, it is important to consider several factors, including the quality of the underlying properties, the management team, and the financial health of the company. Investors should also consider the dividend yield and the potential for capital growth, as well as the overall risk profile of the investment. Given the decline in the index by over -20% in 2022, we expect a better year for the REIT sector.

Australian Equities

The Australian share market has posted its second-best start to a year in at least three decades as optimism grows that inflation will peak lower than the Reserve Bank’s 8 per cent forecast for the December quarter. The index has retraced all its losses in 2022 to touch a nine-month peak of 7472.8 on expectations interest rates will top out as China’s economy rebounds.

Before last week’s Reserve Bank board meeting, the market predicted the cash rate would peak at 3.6%. The day after the market locked in a peak of 3.85%. A week later the peak is now expected to be 4.1%.

Not surprisingly, this expectation of higher interest rates, coupled with general concerns about cost of living, saw consumer confidence fall to a level below that of April 2020 when the entire nation was in lockdown. Australian consumers are less confident than they were then, despite unemployment being at 3.5%.

The latest statement on monetary policy contained the RBA’s first outlook for the economy in 2025. The central bank now expects Australia’s economy from December 2023 to June 2025 to grow by no more than 1.8%: To survive two years of economic growth that low, without tipping into a recession, would be a pretty astonishing achievement – especially given the RBA notes economists expect “mild contractions in GDP in the United States and Euro area, with a somewhat more prolonged recession expected in the United Kingdom”.

Not surprisingly the RBA expects the unemployment rate will rise to 4.4%. It also expects inflation to fall, although a bit slower than it did three months ago. Conversely, the RBA now expects wages to grow faster than they did three months ago. Setting aside the RBA’s history of poor wage growth prediction, this is good news.

I suspect that if those two years of dismal growth do occur, we will be spending a fair bit of time debating whether we are in a recession. Raising interest rates slows the economy – that is the whole point. The Reserve Bank is predicting the economy is going to slow in a manner not seen since the 90s.  For now, it suggests a recession will not occur but, even if this does not happen, you can expect the RBA will need to cut rates in 2024 and 2025 to reverse the damage done by raising them last year and this year.

We think there will be a shift in focus towards earnings instead of valuations over 2023, driven by 2 factors:

• Light at the end of the tunnel in the rate hike cycle (market starts to see the top), shifting the focus away from valuations.
• A global and economic slowdown (caused by aggressive central bank policy to fight inflation in 2022) will shift the focus back to company earnings. Also, a slowdown will likely lead to lower bond yields as the market gets more cautious about growth.

Global markets

Markets want to believe that central banks will blink and change direction, negotiating the economy towards a soft landing. But in our view, a hard landing remains the most likely outcome in 2023. Inflation has dogged markets so far this year and is likely to remain high, bringing an end to the era of easy money and increasing the risk that overtightening by central banks will trigger a sharp recession.

America

The fate of an early year rally in stocks may depend on whether equities can withstand a recent rise in U.S. Treasury yields, as investors increasingly come around to the Federal Reserve’s higher-for-longer mantra on interest rates.

Yields, which move inversely to prices, fell to start the year, after hitting the highest level in more than a decade in late 2022. They have shot higher in recent days, however, following a strong U.S. employment report that led investors to recalibrate expectations for how high the Fed will need to raise interest rates to keep inflation moving lower.

Comments from Fed Chairman Jerome Powell did little to dissuade markets from the notion that the central bank will raise rates higher than investors had previously priced in and keep them elevated for longer, a continued repricing of rate expectations could weigh on equities in coming weeks, after a rally that has seen the S&P 500 gain 8.5% year-to-date and the Nasdaq Composite (.IXIC) rise 15.7%.

In roughly the past month, the 10-year Treasury yield has risen to 3.57% from 3.37% on Jan. 18, the low for the year. Driving that has been stronger-than-expected economic data, which means the rate of inflation may decline at a fairly slow pace. More persistent inflation means the Federal Reserve, which has been lifting interest rates to slow down the rise in prices by reducing demand for goods and services, is likely to keep on doing so.

In theory, the likelihood that higher rates would hurt economic growth should drag stocks lower. That has been the pattern over the past 18 months or so. The stock market has fallen when yields have risen in response to expectations for higher interest rates because investors have reasoned that the Fed’s approach meant slamming the brakes on the economy, rather than just taking away the punchbowl. The fact that companies are seeing profit forecasts drop is evidence that the Fed is having some success.

This year’s trading action seems to indicate investors expect forecasts of corporate earnings will soon rise, which would mean stocks would yield more at current prices. Expectations that the 10-year yield will soon drop, make the yield on stocks more acceptable relative to that on Treasury debt, which could also explain the S&P 500’s strength. The Fed may soon pause its rate increases, making the outlook for earnings more positive and allowing bond yields to fall. That is well and good, unless it doesn’t happen because inflation doesn’t cooperate. Are we seeing a game of chicken now between stocks and bonds? Things could get ugly again for stocks and bonds.

Europe

Despite the pace of rate hikes, we do not believe European interest rates will have to rise as much as in the US. The challenging dynamics of European energy markets and high energy costs facing the region’s businesses and consumers are effectively doing the ECB’s job of suppressing demand and reducing general price pressures.

Mild weather across Europe in October and November meant the rise in energy prices has not been quite as dramatic as feared.

Due to the combination of adaptive responses to the energy crisis and policy approaches, combined with the base effect, this may help Europe to come out of recession first.

An earlier economic recovery should enable European stock markets to decorrelate further with other developed markets—a process that has been underway since the peak correlations seen during the pandemic. In turn, strengthened by attractive relative valuations, we believe this should leave European equities looking relatively attractive, suggesting that the outperformance of European markets versus US markets seen in the second half of 2022 could be extended. Having painted a gloomy picture of the challenges facing consumers, companies, and economies in 2023, we would stress that these headwinds are arguably more fully priced in within European stock markets than in most other equity markets. The region’s stock market valuations have already contracted by over 20%.

There is also some hope that the ECB will not feel the need to tighten too much. Much attention is placed on the central bank’s 2% inflation target. But if the ECB’s words are accepted at face value, this target represents an average over time. As Europe experienced lower rates of inflation until recently, there is room for inflation to run at a higher level for a while (although not at multiples of the 2% target).

United Kingdom

The UK will likely avoid a protracted recession in 2023, but GDP growth is set to remain close to zero. However, with the cost-of-living crisis having a lasting effect on households, for at least 7 million it will certainly feel like a recession.

Inflation continues to remain a concern for the 2023 outlook at both the macroeconomic and household level. Despite falls in the headline figure measures of ‘core’ or underlying inflation suggest that inflationary pressures are still present in the UK economy.  The CPI (consumer prices index) measure of inflation came in at 10.1%. That’s still 8.1 percentage points above the 2% the Bank of England is meant to keep it at. But the latest reading will come as a relief to the Bank which, judging by its various forecasts, is hopeful that it won’t have to raise rates any higher than 4.5% this year to get inflation back under control. The pound has been on the rise off the back of a UK jobs report that brought higher employment, lower claims, and a decline in average total wages. Between those three elements, there will be some optimism that the economy is moving in the right direction.

However, there is a caveat here, with average earnings excluding bonuses posting an unexpected rise (6.7%) which pushes back against the idea that wages have topped out. The fact that wages continue to surge when stripping out bonuses does provide continued concerns that businesses are going to ultimately raise prices to maintain profitability in the wake of higher input costs.

Whereas in recent years its bias towards the commodity sectors has been a negative for the UK market, we believe its tilt to these areas should stand it in good stead over the next year or two as commodity prices should remain well supported and these sectors remain fair value.

Japan

Japan’s economy averted recession but rebounded much less than expected in October-December as business investment slumped, a sign of the challenge the central bank faces in phasing out its massive stimulus program. Japan’s delayed economic recovery was believed to be dragged down in 2022 mainly by the following three factors.

First, the central banks of developed countries in the United States and Europe such as the Federal Reserve rapidly tightened monetary policies, and the Bank of Japan had to maintain its ultra-loose monetary policy due to the domestic economic situation.  Since 2022, the country has continued to face the pressure of currency depreciation and rising import costs. In addition, the Ukraine crisis has kept international commodity prices high, further amplifying the impact of yen’s devaluation on the economy.

Secondly, repeated waves of COVID-19 pandemic significantly affected the Japanese consumer sector, and when commodity prices continued to spike and real wages dropped instead of increasing, it has begun to dent consumer sentiment.

Thirdly, due to the slowdown of overseas economies and the decline in demand in Europe, the United States, and other countries, many export industries that are of great significance to Japan’s economic growth have been suppressed, dragging down the contribution of exports to the economy.

Japan’s inflation rate has recently hit a 41-year-high. This has kept alive expectations that the Bank of Japan could phase out its ultra-low interest rates – it opted to keep rates unchanged on 18 January to enable it to continue servicing its debt repayments – although some analysts do not expect this any time soon, because of uncertainty over whether wages will increase enough to offset rising living costs.

Prime Minister Fumio Kishida says wage hikes will be key to starting a positive cycle of growth. Japan raised its minimum wage by a record rate of 3.3% last year, but it is failing to keep pace with inflation.

While private consumption is holding up against headwinds from rising living costs, uncertainties over the global economic outlook will weigh on Japan’s delayed recovery.

In 2022, a weakening yen (JPY) and more competitive exports helped support Japanese equities. This year, however, we see the yen strengthening against the US dollar (USD), with the USDJPY trading around 120 by the end of 2023, from today’s 130. The US Federal Reserve is slowing the pace of rate hikes while the BoJ tightens policy. The yen is also benefiting from the economy’s improving terms of trade. It increasingly looks like an attractive alternative haven currency to the dollar. A change of dynamic for the yen will have implications across markets, with a tailwind for Japanese equities becoming a headwind in 2023.

China

Beijing is shifting its focus from managing the pandemic to reviving the economy. However, there is a lack of trust between China and the United States and between private-owned enterprises and the Chinese government. The former is going to take some time to rebuild; there is no clear signal that the relationship will get better soon.  The more important thing for Beijing for now is to motivate and encourage entrepreneurship and re-stimulate domestic demand.

China’s reopening policy suggests that the country is prioritising economic growth, and this will lead to sizeable economic growth and investment opportunities. In the past weeks, Morgan Stanley analysts, for example, have been predicting a 5.7 percent GDP growth this year. Chinese Vice-Premier Liu He’s speech at the recent World Economic Forum annual meeting in Davos also suggests that government policies will be adjusted to encourage growth.

Going forward, companies are paying increasing attention to their supply chain resilience. China re-entering the global economy gives companies opportunities to leverage the country’s manufacturing capabilities, logistic infrastructure, and labour force. Nonetheless, executives are cautious about the increasing geopolitical tension between the United States and China.

Over the past couple of years, many companies and industries have built or rewired their supply chains in different ways as a response to the supply chain challenges that they encountered during Covid-19. Regional supply chains in Europe and Latin Americans have picked up the slack. Such companies may be less willing to go back to the old way of doing things as regional supply chains can offer more resilience despite the costs. Still, China continues to boast lower costs, better infrastructure, more advanced digitalisation, and more skilled workers. It also remains one of the largest potential markets that can spur companies’ growth.

China’s reopening is set to provide a welcome boost to global growth, offsetting weakness in Europe and a looming recession in the US. But unlike in 2009, when China’s four-trillion-yuan stimulus helped kickstart a recovery from the Lehman slump, in 2023 there’s a catch — a boost to inflation at exactly the moment the Federal Reserve and other central banks race to bring it back under control.

Kristalina Georgieva, the Head of the International Monetary Fund, says that China’s pivot from Covid Zero is probably the single most important factor for global growth in 2023, but cautioned on what it might mean. China will likely consume more energy as its economy recovers, putting upward pressure on prices of oil and other commodities. At the same time, however, its reopening could ease supply-chain bottlenecks and enable factories to boost production, resolving some problems that contributed to higher inflation in 2022.

I do not see any particular reason why the competitive market would have left out any profitable investment opportunities – overall the market is quite efficient. The MSCI China index has risen significantly since the low in November 2022, and it is likely that the market has already factored in the expectation of a better economic outlook for China.

As such, to justify a particular bet in China (relative to alternatives), one would need to come up with an argument for what positive surprises might materialise. For example, might the government relent further in its crackdown on tech industries? Might the central bank stimulate the market with extraordinary measures? These are much harder to speculate at this stage.

Emerging Markets

Investors are betting the reopening of the world’s second-largest economy will power markets across the region. In the final week of January, Asia (ex-Japan) funds accounted for the largest share of EM share market inflows at $US4.2 billion ($6.1 billion), JPMorgan data shows, marking the third consecutive week of strong inflows. After lagging the developed economies, especially US equities, for more than a decade, emerging markets are in a much stronger position to outperform developed countries this decade.

The International Monetary Fund projects emerging market and developing economies to grow at 4 per cent in 2023. China is forecast to grow 5.2 per cent. Meanwhile, advanced economies will grow at just 1.2 per cent, and the UK is set to shrink by 0.6 per cent.

At the heart of the bullish outlook for emerging markets is a divergence in monetary policy from developed markets while advanced economy central bankers spent 2021 debating whether inflation was “transitory” or not, their emerging market peers in parts of Europe and Latin America got on with the business of raising rates to tamp down price pressures. As these central bankers led the charge to bring down inflation, so they’re likely to be in the vanguard when it comes to cutting interest rates later this year.

After the recent rally and downward revisions to 2023 earnings expectations EM equities are no longer cheap on a forward P/E basis. The price-book ratio is close to its historical median. On a dividend yield basis, EM remains cheap versus history. There remains considerable variability between sector valuations in EM. Various growth sectors remain much more expensive than value sectors. On a regional basis, Latin America remains cheap on a forward price-earnings basis. Valuations in Asia and EMEA are above their historical median.

Commodities

To say commodities are back in vogue could be premature. The world today is different from 40 years ago. The previous commodity bulls were mainly driven by rapid economic growth. Market observers believe that it could be different this time around.

Technological and regulatory shifts towards cleaner and greener energy, including electric vehicle (EV) adoption, renewable energy investments and changing consumption habits could see oil majors being cautious with their capital investments. On the other hand, these developments could see demand for raw materials such as copper, steel and other metals take off, especially in the building of EVs and the infrastructure to support these.

A report by the International Energy Agency (IEA) notes that the world is currently on track for a doubling of the overall mineral requirements for clean energy technologies by 2040. It says a typical electric car requires six times the mineral inputs of a conventional car, while an onshore wind plant requires nine times more mineral resources than a gas-fired one. The shift to a clean energy system is set to drive a huge increase in the requirements for these minerals, meaning that the energy sector is emerging as a major force in mineral markets. Presently, fossil fuels generate 85% of the world’s energy while alternative energy produces 15%. In this regard, the energy transition to a more sustainable energy framework will be resource-intensive for the short to medium term. Unless there is a meaningful supply response, energy prices are expected to remain elevated.

Gold

Record-high central bank buying combined with investor sentiment around global monetary policy has driven a gold price surge of about 15% since early November 2022. Central banks bought 673 tonnes of gold, a record high, through the first three quarters of 2022 and then continued to accumulate gold in October and November at a slower pace, according to the World Gold Council. Central banks have been net purchasers of gold since 2010, the industry organisation’s data shows.

In recent years, emerging and developing economies’ banks have dominated net gold purchases. The price of gold is expected to rise in 2023, primarily driven by intermarket dynamics. The odds favour a slowdown in the rise of both the U.S. Dollar and bond yields, particularly as 2023 progresses. The U.S. Dollar and bond yields are leading indicators for gold. Moreover, inflation expectations should continue to rise in 2023 and the monetary continues to expand. These expected trends in gold’s leading indicators should be supportive of gold.

WTIS

The easing of Covid restrictions in China as well as the recently imposed price cap on Russian crude should keep oil prices supported in 2023 – however, global growth concerns are weighing on the minds of investors. Looking ahead throughout 2023, there are a couple of things to keep in mind. One, the US has confirmed it will start replenishing its Strategic Petroleum Reserves (SPR) at a price between $68 and $72, meaning there may be a further reason for support up ahead.

Two, despite the reaction to the Chinese reopening trade being muted so far, the risk of recession is likely already discounted in the price of crude meaning there could be room for optimism in the second quarter of 2023 if the economic data shows more resilience than expected. In the short term, this could be a headwind for oil prices however a combination of lower Russian oil supply and OPEC+ supply cuts means that the global oil market is expected to tighten over 2023. We expect a growing deficit over the course of the year, which suggests that oil prices should trade higher from current levels.

Agriculture commodities

A December 2022 report released by the International Monetary Fund (IMF) has indicated that global food prices are expected to remain high because of war, energy costs, and weather events, despite interest rate hikes having slightly eased price pressures. Record prices have increased food insecurity, raised social tensions, and strained the budgets of countries that rely on food imports. Although rising interest rates tend to apply downward pressure on food prices by discouraging inventory holdings and reducing speculative activity in commodity future markets, rate hikes could also decrease personal incomes by slowing economic activity broadly. International food prices are estimated to have added 5 and 6 percentage points to consumer food inflation in 2021 and 2022, respectively, and are forecasted to add an estimated 2 percentage points in 2023.

The report suggests that it could take up to a year for this change in international prices to pass through to domestic retail food prices, meaning that many people will have to wait for relief from lower commodity prices.

 

Sector	12 Month Forecast	Economic and Political Predictions
AUD	68c-76c	Given strong trade linkages, China’s reopening should improve sentiment toward the Australian dollar. As for the Australian economy, growth has been steady, and we do not expect a recession to occur this year. With inflation somewhat elevated, we also do not expect Australia’s central bank to ease monetary policy through 2024.
Gold	BUY $US1700-/oz- $US2100/oz	The outlook for precious metals is more positive, with all but palladium expected to end 2023 higher. With the Fed on pause, decreasing U.S. real yields will drive the bullish outlook for gold and silver prices over the latter half of 2023.
Commodities	BUY As China reopens and economic activity increases, we expect signs of robust demand for commodities by Q2 2023	The Chinese economy started the year fully reopened which can boost the country’s economic growth and increase commodity demand by the second quarter of the year, particularly oil and industrial metals. Additionally, an end to the US dollar rally, which surged to a twenty-year high in 2022, could also be supportive of commodity prices.
Property	BUY .	When considering investing in REITs, it is important to consider several factors, including the quality of the underlying properties, the management team, and the financial health of the company. Investors should also consider the dividend yield and the potential for capital growth, as well as the overall risk profile of the investment. Given the decline in the index by over -20% in 2022, we expect a better year for the REIT sector.
Australian Equities	BUY	At least two more rate hikes will not derail the economic cycle in Australia. Australia retains significant economic momentum, the labour market is strong, and China is reopening and re-engaging with Australia. A recession is avoidable and completely unnecessary to bring inflation back to target.
Bonds	Begin to increase duration.   .	With inflation still hot, central banks are more likely to try to cool economic growth and tighten financial conditions than to boost them. And if they don’t fight inflation, there’s a risk that longer-dated bond yields will increase anyway because of rising long-term inflation expectations. But until central banks stop hiking and inflation normalises further, they are unlikely to be a reliable buffer for risky assets.
Cash Rates	2.5%-4.1%	The big four banks have all cast their predictions for the next few years of cash rate movements. For the average owner-occupier paying a variable rate, your home loan rate could reach 6.86% by the first half of 2023. In March, the big four banks have forecast another 25 basis points hike to the cash rate. Both ANZ and NAB expect the cash rate to peak at 4.10% by May 2023.
Global Markets
America	Underweight	The economic numbers indicated that the US economy has not fully felt the Federal Reserve’s year-long attempt to curb growth and bring down inflation through an aggressive campaign of rate increases. The bear market rally that began in October from reasonable prices has turned into a speculative frenzy based on a Fed pause/pivot that isn’t coming.
Europe   UK	Neutral   BUY	European indexes have greater exposure to banks (as in the case of the IBEX 35) and others to commodities (such as the British FTSE 100). Also, in general, most indexes have less exposure to the technology sector and more to the energy sector.
Japan	Neutral	Equities yield well more than bonds (helped, in no small part, by the impacts of yield-curve control policy on the country’s bond market). This means they are likely to be favoured by investors as they search for an alternative to cash for their holdings.
Emerging markets	Start Buying	Emerging markets have been trading at a 35 per cent discount to developed markets on price/earnings (PE) terms and at a 44 per cent discount on a price-to-book basis. There is considerable variance across regional valuations, but that’s to be expected.
China	BUY	We believe abnormally high deposits from 2022 will not be deployed exclusively toward consumption, as they also reflect a reallocation of assets away from property and other investments that may revert in 2023.