JPMorgan Chase & Co’s Investment Outlook 2023 report predicts a bad year for the economy but a better year for markets.
JPMorgan’s core scenario sees developed markets falling into a mild recession in 2023 on the back of four factors:
- Tighter financial conditions.
- A less supportive fiscal policy in the United States.
- Geopolitical uncertainties.
- The loss of purchasing power for households.
The most important question going into 2023 is whether inflation will start to behave as economic activity slows.
“If so, central banks will stop raising rates, and recessions, where they occur, will likely be modest. If inflation does not start to slow, we are looking at an uglier scenario,” JPMorgan said.
The investment bank believes that inflation should start to moderate as economic activity starts to slow.
Other factors driving down inflation include a weaker labour market, easing supply chain pressures, and Europe diversifying its energy supply.
“However, we remain in an unusual environment, and it’s as important to keep an eye on the risks to our central view as they are skewed to the downside,” the bank said.
Despite recessing concerns, JPMorgan is upbeat about the prospects of the stock market.
It said both stocks and bonds had pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive.
“We are more excited about bonds than we have been in over a decade,” JPMorgan said.
It added that the broad-based sell-off in equity markets had left some stocks with strong earnings potential trading at very low valuations.
“We think there are opportunities in climate-related stocks and emerging markets,” it added.
“We have higher conviction in cheaper stocks which have already priced in a lot of bad news and are offering dependable dividends.”