Swiss private bank Lombard Odier has published its latest investment strategy report for private clients, discussing its global markets' outlook and asset allocation strategies for the first half of 2023.

Lombard Odier expects a tough first half of 2023, with recessionary episodes in major economies including the US and Europe, and unemployment rising, before the process of recovery begins.

In the US, the bank is more confident that a monetary policy mistake can be avoided, with the prospect that 5 per cent will represent a ceiling rather than a floor for interest rates in early 2023.

Meanwhile, mild weather in Europe continues to support hopes that the continent can ride the coming winter without widespread blackouts and energy rationing, amid healthy gas storage levels, the firm said in a statement. It still expects the eurozone economy to expand well below 1 per cent in 2023.

China’s 2023 outlook depends heavily on its reopening prospects, the bank continued.

Turning to asset allocation, the bank expects 2023 to divide into two distinct phases – the first defined by tighter monetary policy and slowing growth, the second by a peak in real rates that creates better opportunities for risk assets.

An upcoming pause in monetary tightening should see sovereign yields peak soon, offering an improved risk reward profile for high-quality fixed income. The bank sees opportunities for riskier credit improving once recession risks are priced in.

Equity valuations are not yet cheap in the broader sense, as earnings' downgrades unfold, but the firm said it sees better prospects ahead

In terms of currencies, the bank believes that it may be approaching the end of dollar strengthening, though a strong depreciation trend is far from a done deal. As recessionary fears rise, trade-sensitive currencies like the Chinese yuan and sterling, could suffer.

Asia focus 
Lombard Odier believes that Japan’s economy will outperform its developed market peers in 2023, due to ongoing reopening momentum and fiscal support. New household energy subsidies will lower headline inflation temporarily, but Lombard Odier expects it to hover above the Bank of Japan’s 2 per cent target for much of 2023.  

China’s 2023 outlook depends heavily on its reopening prospects, the bank continued. Gradualism will continue to guide the reopening process. 

Permanent reductions in Covid-19 restrictions are likely in the second half and, in this scenario, Lombard Odier expects 4 per cent full-year growth.

Meanwhile, emerging markets, ex-China, will experience growth deceleration in 2023. Emerging Asia will outperform other regions substantially thanks to South Asia’s resilience, the bank continued. 

The policy outlook will stabilize as softening inflation leads to the end of rate hikes for key economies in the first half of 2023.