Santander Wealth Management & Insurance, the division that includes Santander’s private banking, asset management and insurance units, believes growth and inflation will still be causes for concern next year; but markets are already showing signs of a comeback.
“We expect that confirmation of peak inflation in Q1 2023 may lead to a pause in interest rate hikes by central banks, which would set in motion the recovery process in fixed-income markets”, said Víctor Matarranz, global head of Santander Wealth Management & Insurance, in his opening letter in the 2023 Market Outlook report titled The great rate reset. According to Matarranz, “The recovery of more cyclical assets, like equities, should get underway inH2 2023 if central banks announce lower interest rates. More than ever, it is paramount to balance a short- and long-term vision when managing investments”.
Santander expects a macroeconomic shift, with efforts to stabilize prices already entering final stages. “We believe that we are close to terminal policy rates and that the level of monetary tightening reflected in the curves will be enough to change the course of inflation. This phase of monetary stabilization will probably last most of 2023 as we do not expect a rate cut until there are clear signs that inflation is under control. The good news will come first to defensive assets (fixed income) and then to cyclical assets (equities)”, according to the report.
Santander says that, while inflation won’t peak at the same time in every market, there’ll be “clear signs of a trend shift” in Q1 2023.
It also expects low growth in the coming quarters, with moderate recession in some countries. Nonetheless, “it seems unlikely that the economy will see the same upheaval as in previous crises like the financial crash of 2008 and the dotcom bubble of 2000”.
The report suggests that “progress in monetary stability would provide plenty of opportunities in fixed income assets as yields stabilize at very attractive levels relative to the previous decade”. It also says that “rate increases have been the villain of the markets in 2022 but going forward they provide a bedrock of safe yield. Conservative investors are celebrating the fact that liquidity is no longer penalized”. Better bond yields will encourage investors to diversify portfolios. For corporate bonds, the report recommends increasing credit risk in portfolios amid an expected end to economic slowdown.
Santander also advises a cautious approach for equities, until earnings’ review are completed, so investors will have to wait. “Earnings forecasts are being revised”, says the report, but there could be more downwards adjustments, in line with predictions of a slowdown in 2023.
Also, due to shifts in structural inflation (above 2% in the midterm),the report encourages investors to take up more shares, infrastructure, property and other real assets. Alternative investments, especially in private equity and private debt, are also key.
The report affirms that, as interest rates stabilize and the economy recovers, the market will shift focus back to innovative, high-growth companies. The most attractive opportunities will be in biotechnology, energy transition, cyber security, foodtech, robotics, sustainability, with renewable energy at the top of the list owing to the energy crisis.