Investment Outlook: Inflation downturn will ease risk picture

7 februar 2023 09:18

A brighter international outlook is emerging, due in particular to an improved inflation outlook. Yet we still expect a mild recession during 2023, with a recovery starting in the second half of the year. We believe that this outlook is discounted in financial markets, with bond yields at more normal levels and equity valuations in line with historical averages. Despite prospects of a brighter outlook, we are maintaining a neutral allocation between asset classes in our portfolios because of the impending slowdown in growth and earnings.

“In a slightly longer perspective, market performance this past year represented a period of robust normalisation. We once again have clearly positive interest rates in the financial system, while the pandemic bubbles that emerged in 2021 have largely deflated. This creates potential for attractive future return levels. It is also now possible to build different types of portfolios with reasonably high expected returns. This could not be done when key interest rates were zero or even negative, at the same time as parts of the stock market had reached disturbingly high valuations,” says Fredrik Öberg, Chief Investment Officer at SEB’s Private Wealth Management & Family Office Division.

Allocation

The past quarter saw a strong recovery in capital markets, bringing both stock and bond valuations and investor positioning into more neutral territory. Given these conditions, we find it appropriate to have portfolios that are close to neutral in terms of risk.

Being close to neutral means that we expect to benefit from risk premiums and that our portfolios will generate positive returns in the coming period. This is synonymous with corporate bonds providing higher returns than government bonds and stocks providing higher returns than corporate bonds over a somewhat longer time horizon. That we are not further increasing our proportion of equities is due to the expected economic downturn combined with neutral valuation signals, as well as the the fact that bonds have an attractive expected return since we believe that high bond yields will fall. This will also serve as a stabiliser against possible corporate earnings and cyclical disappointments.

Theme articles

This February 2023 issue of Investment Outlook also includes two theme articles:

Global fragmentation – a critical inflection point with major consequences: a review of global fragmentation winners and losers among Swedish companies
Increased hopes of much lower inflation

Investment Outlook can be read in its entirety or as a 2-page summary at www.seb.se/investmentoutlookreport, where a web video is also available.