A Year of Inflections

Year Ahead 2023

Welcome

Year Ahead 2023

Navigating inflection points will be key to investment success in the year ahead. It will be our challenge and privilege to help guide you through them. We thank you for your trust and look forward to helping you realize your financial goals.


A Year of Inflections

In 2022, inflation stayed high, interest rates rose, growth expectations fell, and both equity and bond markets suffered. 2023 will be a year of inflections as investors try to identify turning points for inflation, interest rates, economic growth, and financial markets against a complex geopolitical backdrop.

What does it mean for investors?

History tells us that durable turning points for markets tend to arrive once investors begin to anticipate interest rate cuts and a trough in economic activity and corporate earnings. As we enter 2023, high inflation and rising interest rates alongside elevated earnings expectations and geopolitical risks inform our investment themes of defensives, value, income, and safety. But we think the backdrop for risky assets should become more positive as the year progresses. This means investors with the patience and discipline to stay invested should be rewarded with time. Investors currently sheltering from volatility will need to plan when, and how, to rotate back into riskier assets over the course of 2023.

Policy risks

What might derail a market inflection point?

The past year has demonstrated how policy choices not only add to volatility, but also have the potential to change the trajectory of asset markets. Russia’s invasion of Ukraine, China’s approach to managing COVID-19, and even the financial instability spurred by the UK’s “mini-budget” all affected global economies through multiple channels. In 2023, the key policy risks include an escalation in the Russia-Ukraine war, economic policy missteps in China, heightened geopolitical tensions, and monetary or fiscal policy errors.

Escalation in the Russia-Ukraine war

As well as being a humanitarian and environmental disaster, Russia’s invasion of Ukraine in 2022 had a significant impact on the global economic trajectory—adding an inflationary shock to a world already navigating resurgent demand, tight labor markets, and supply chain disruption.

As we enter 2023, Russia’s annexation of occupied territories in Ukraine poses a threat to global markets. The annexation brings these areas under Russia’s nuclear doctrine, meaning that if Ukraine continues its efforts to reclaim these regions, a retaliation by Russia beyond conventional warfare cannot be ruled out. In turn, this would increase the risk of a direct confrontation between NATO and Russia.

Economic policy missteps in China

After many years in which China’s policy measures were oriented toward driving economic growth, the country’s leadership is now focused on achieving a broader range of objectives—including self-sufficiency, national security, and common prosperity. In the near term, the greater consolidation of power under President Xi following the 20th Party Congress has prompted concerns about a continuation of pandemic controls. If China extends its zero-COVID policy through all of next year, it would make it less likely that global growth will trough in 2023.

Separately, the consolidation of power has also led to investor concern over less support for the private sector, a heightened risk of policy mistakes, and lower long-term rates of economic growth.

Heightened geopolitical tensions

Antagonism between the US and China continued to rise in 2022. China’s refusal to condemn Russia in its war with Ukraine, US House Speaker Nancy Pelosi’s visit to Taiwan, and military drills around the island heightened tensions. Meanwhile, the US CHIPS Act and White House directives to restrict China’s access to advanced technologies have added to the trend of technological divergence between the two nations.

In 2023, Taiwan will remain a potential geopolitical flashpoint. President Xi remains committed to reunification while President Biden has repeatedly stated that US forces would come to Taiwan's defense in the event of an “attack.” Although attempts to reunify mainland China and Taiwan are unlikely to materialize next year, tensions surrounding national security are likely to mean a continuation of technological and supply chain localization, with implications for sectors across Asia.

Geopolitical tensions are not limited to those between the US and China.

In October, President Biden warned Saudi Arabia that “there will be consequences” after it joined with Russia and other OPEC+ producers to cut oil output. A risk for the market in 2023 would be if Biden’s “consequences” prompt a further output cut by Saudi Arabia, sending oil prices higher and weighing further on the growth outlook.

Monetary and fiscal policy errors

Disruption in the UK gilt market in 2022 illustrated the challenges facing governments that try to increase borrowing while central banks sell government bond holdings to reduce inflation. While events in the UK had idiosyncratic aspects, a risk for next year is that the UK might be a forerunner of financial instability in other markets.

In the Eurozone, we are monitoring the risk that the unwinding of quantitative easing could prompt stress in bond markets. The European Central Bank’s Transmission Protection Instrument is designed to mitigate these challenges, but it remains unclear how it would work in practice, and it is unlikely to be deployed proactively.

In the US, as the Fed conducts quantitative tightening, we are monitoring for the risk of a funding squeeze similar to 2019, when the Fed’s balance sheet run-down caused undue tightening in dollar funding conditions. Meanwhile, a divided US government could presage potential battles over the federal budget and debt ceiling, which could affect markets.

Oil transmits geopolitical tension into economic outcomes

Brent crude oil prices, in USD/bbl

Chart showing Brent crude oil prices in USD/bbl from January to November 2022
Source: Refinitiv, UBS, as of 10 November 2022

What to do with China exposure?

China’s stock market suffered a 44% loss in the first 10 months of 2022, in part because stricter COVID-related mobility restrictions hampered consumption and new business investment. At the time of writing, China’s weight in the MSCI All Country World Index is close to 3%. We think this level of holdings of Chinese stocks in global equity portfolios is adequate given the near-term risks from the country’s ongoing zero-COVID policy and challenges in the property sector. We recommend overexposed investors diversify into global defensives and value. That said, China’s economy may offer long-term opportunity for investors who have no allocation to the country, particularly in the supply chains of electric vehicles and renewable energy, and in consumer services and durables.

Rate cuts

When will central banks cut rates?

Higher interest rate expectations were a key contributor to weak market performance in 2022. History tells us that, prior to market bottoms, investors usually begin to anticipate Fed rate cuts. We think inflation should be close enough to target by the end of the year for the Fed to consider rate cuts.

At the time of writing, interest rate cuts seem a distant prospect. Inflation is far higher than official targets, and with central banks seeing their credibility at stake, rates are likely to be hiked further still. We expect interest rates to peak around 5%, 2.5%, and 1.5% in the US, the Eurozone, and Switzerland, respectively.

That said, we do think that year-over-year rates of inflation have topped out in the US. Real-time indicators of future inflation, including new rents, wage growth, import prices, and price-paid indexes, are almost all pointing down; durable goods prices are falling; and services inflation is largely being driven by profits—an unusual and likely temporary phenomenon.

Inflation is also likely to peak in Europe soon, as the impact of higher energy prices begins to fade and as higher rates discourage consumer and business spending. Falling rates of inflation should allow the Fed, the ECB, the SNB, and the BoE to complete their hiking cycles in the first quarter of 2023, or the second quarter at the latest.

How quickly central banks and investors then turn their attention to potential rate cuts will depend on the data, as they both seek evidence that inflation is heading sustainably back to target before contemplating lower rates.

In our base case, we think year-over-year rates of inflation in the US and Europe will be close enough to central banks’ 2% target toward the end of 2023 for policymakers to refocus their attention on economic growth and employment, and consider rate cuts.

What does it mean for investors?

We think that high inflation and still-rising interest rates are likely to mean continued volatility for risky assets in the near term.

But evidence that inflation is falling sustainably, an end to Fed rate hikes, and anticipation of potential rate cuts should present a more supportive backdrop for markets as 2023 progresses. So while we advocate a defensive posture as we enter the new year, it is also important for investors to stay invested in line with longer-term plans, and retain upside exposure so that portfolios do not get left behind as markets attempt to anticipate a turning point.

Two-year Treasury yields usually fall prior to market bottoms

Fall in 2-year US Treasury yield from peak in the six months prior to bear market bottom, in basis points

Bar chart showing fall in 2-year US Treasury yield from peak in the six months prior to bear market bottom, in basis points
Source: Bloomberg, UBS, as of November 2022

Inflation and rates – risk scenarios

A downside scenario for markets is that inflation fails to fall back to target as quickly as expected, delaying rate cuts or forcing further rate hikes. Central banks will be particularly watchful for the risk that, by pausing rate hikes, they may reignite inflationary forces.

An upside scenario is that a combination of easing supply chains, a more balanced US labor market, and improvements in commodity supplies means that inflation falls more quickly than expected, allowing central banks to tilt toward rate cuts sooner.

Growth reacceleration

When will growth reaccelerate?

Tight US monetary policy, the energy crisis in Europe, and ongoing COVID-19 and property market challenges in China are likely to contribute to lower economic growth and earnings declines in 2023. But we think global growth should trough during the year.

As we enter 2023, the world economy is decelerating. The US is still in expansion, but higher interest rates, tighter financial conditions, and weakening property and labor markets will have a lagged, negative impact in the months ahead. The Eurozone and the UK are likely already in contraction given the combined impact of the energy crisis, inflation, and monetary tightening. And China’s recovery continues to be delayed by issues relating to COVID-19 and the property market.

Given the likelihood of a near-term deterioration in economic growth, we think further downward earnings revisions can also be expected in the months ahead. Overall, we are looking for a 4% earnings contraction in the US, a 10% decline in Europe, and 2% growth in Asia, below consensus expectations of growth of 4%, 3%, and 7%, respectively.

But while the near-term outlook is challenging, we also think world economies will trough in 2023.

In Europe, growth should start to improve midyear as the continent’s energy crisis begins to ease after the winter, even if next winter may also pose challenges. In China, contingent upon a reopening in the middle of the year, economic growth should also improve, potentially with the help of higher infrastructure spending. In the US, a trough is likely to come later, given the strength in the economy thus far and the lagged impact of tighter monetary policy. But consumption and investment could be supported in the second half provided inflation is lower and financial conditions are looser.

What does it mean for investors?

Downward revisions to company earnings estimates mean the risk-reward is unfavorable for risky assets over the coming months. But we note that historically markets start to turn between three and nine months prior to a trough in economic activity and corporate profits.

With this in mind, a more constructive environment for risky assets should start to emerge during the year, as markets anticipate potential turning points in economic and earnings growth rates.

History also tells us that trying to anticipate a precise turning point for the market can often result in failure, and the best way for most investors to position for more favorable markets ahead is to keep a diversified portfolio, consistent with long-term investment plans.

Once a turning point arrives, markets that have already priced in most bad news and where valuations are lowest have the greatest potential for a rebound, which currently look like European and emerging market equities.

Global GDP growth to decelerate but improve in the second half

Real GDP growth including UBS forecasts starting 3Q22, q/q, in %

Chart showing real GDP growth including UBS forecasts starting 3Q22, q/q, in %
Source: CEIC, Haver, National statistics, UBS, as of November 2022

Markets tend to trough ahead of the economy

US stocks, earnings, and GDP months before and after equity market low, indexed

Chart showing US stocks, earnings, and GDP months before and after equity market low, indexed
Note: Average around bear market troughs in 1974, 1982, 1990, 2002, 2009, and 2020. Source: Refinitiv, UBS, as of October 2022

Growth – risk scenarios

A downside scenario for markets would be a deeper and more prolonged economic contraction than expected. The Fed’s own labor market projections are consistent with a recession, and US recessions have historically had global spillover effects. In Europe, a colder-than-average winter could strain the provision of energy supplies, deepening the economic downturn. And in China, a longer-than-expected adherence to strict zero-COVID policies could further delay the recovery.

An upside scenario would be a faster and stronger reacceleration in economic growth than expected. A détente between Europe and Russia or warmer winter temperatures could alleviate the energy crisis and boost growth expectations for the region. We could see upside to China’s growth prospects if Beijing were to more quickly reopen or roll out additional stimulus. Meanwhile, a faster-than-expected fall in inflation and lower borrowing costs could support growth in the US.

Scenario analysis

Scenario analysis

 

 

Upside

Upside

Base case

Base case

Downside

Downside

 

Probability

Probability

Upside

20%

Base case

50%

Downside

30%

 

Central banks

Central banks

Upside

Inflation falls faster than expected, allowing a tilt toward rate cuts sooner. The lagged effect of monetary policy could support inflation surprising to the downside.

Base case

Falling inflation allows the Fed, the ECB, the SNB, and the BoE to complete their hiking cycles in 1Q23, or 2Q23 at the latest.

Inflation in the US and Europe is likely to be close enough to the 2% year-over-year targets toward end-2023 for rate cuts to be considered.

Downside

One of at least two paths could lead financial conditions to tighten much further from current levels:

Inflation fails to fall back to target, delaying rate cuts or forcing further rate hikes.

Central banks pause rate hikes too early, stimulating near-term growth and reigniting inflationary forces, in turn requiring further hikes.

 

Economic growth

Economic growth

Upside

Economic activity reaccelerates due to:

A faster-than-expected revision of the zero-COVID policy or additional stimulus in China; or

A faster-than-expected decline in inflation, and lower borrowing costs in the US; or

A détente between Europe and Russia or a warmer winter, alleviating the energy crisis.

Base case

The US economy is still in expansion but slowing. 

Following a period of sub-trend ­or ­negative­ growth, ­a trough ­in ­economic ­activity ­is ­likely ­to ­come­ later ­in ­the year given the lagged impact of monetary policy.

In ­China,­ provided ­zero-COVID policies are at least partially ­relaxed ­by ­midyear, economic growth should also improve.

The ­Eurozone­ and ­the ­UK­ are ­likely ­already ­in ­recession. Growth ­in ­Europe­ should improve as the energy crisis begins to ease after­ the ­winter.

Downside

Growth falls more sharply than expected due to tight monetary policy and inflation continuing to outpace wage growth.

In Europe, a colder-than-expected winter strains energy supplies, deepening the economic downturn.

China's reopening is delayed to 2024.

The economic downturn prompts lower corporate earnings, rising default rates, and falling commodity prices.

 

Geopolitics and other key drivers

Geopolitics and other key drivers

Upside

The war in Ukraine deescalates or is resolved.

Base case

The war in Ukraine drags on and keeps markets volatile.

Financial conditions tighten and increase the market’s vulnerability to external shocks.

Downside

The war in Ukraine escalates or US-China tensions intensify.

Financial conditions tighten even further, causing stress in the financial system.

 

Market path

Market path

Upside

The backdrop for riskier assets brightens as investors see rate cuts and a trough in economic growth on the horizon.

Base case

Markets remain volatile and under pressure from inflation and rate fears, and amid weaker growth expectations.

The risk-reward balance remains unfavorable for risk assets, with stocks ending June 2023 slightly below current levels.

Downside

The market experiences a severe downturn, with riskier asset classes such as equities posting double-digit losses. Credit spreads widen, while safe havens benefit.

Source: UBS, as of December 2022

Scenario targets for June 2023

 

 

Spot*

Spot*

Upside

Upside

Base case

Base case

Downside

Downside

 

MSCI AC World

MSCI AC World

Spot*

756

Upside

850

Base case

720

Downside

640

 

S&P 500

S&P 500

Spot*

3,995

Upside

4,400

Base case

3,700

Downside

3,300

 

EuroStoxx 50

EuroStoxx 50

Spot*

3,975

Upside

4,550

Base case

3,800

Downside

3,300

 

MSCI China

MSCI China

Spot*

65

Upside

73

Base case

69

Downside

52

 

US 10y Treasury yield

US 10y Treasury yield

Spot*

3.48%

Upside

2.50%

Base case

3.50%

Downside

4.50%

 

US 10y breakeven yield

US 10y breakeven yield

Spot*

2.19%

Upside

2.00%

Base case

2.25%

Downside

3.00%

 

US high yield spread**

US high yield spread**

Spot*

437bps

Upside

300bps

Base case

600bps

Downside

850bps

 

US IG spread**

US IG spread**

Spot*

117bps

Upside

60bps

Base case

150bps

Downside

200bps

 

EURUSD

EURUSD

Spot*

1.07

Upside

1.10

Base case

1.05

Downside

0.98

 

Commodities (CMCI Composite)

Commodities (CMCI Composite)

Spot*

1,884

Upside

2,200

Base case

2,000

Downside

1,600

 

Gold

Gold

Spot*

USD 1,807/oz

Upside

USD 2,000–2,100/oz

Base case

USD 1,800/oz

Downside

USD 1,500–1,600/oz

* Spot prices as of market close of 14 December 2022
** During periods of market stress, credit bid-offer spreads tend to widen and result in larger ranges.
Note: The asset class targets above refer to the respective macro scenarios. Individual asset prices can be influenced by factors not reflected in the macro scenarios
Source: UBS, as of December 2022

The Decade Ahead

The Decade Ahead

This “Decade of Transformation” has already brought significant changes in the global economic, political, societal, and environmental landscape. But we think a more positive secular backdrop remains possible. That said, each of these potential positive drivers has a flip side that could make for a more challenging environment in the years ahead.

Central banks are determined to bring inflation under control

Unlike in the 1970s, central banks today are highly focused on reducing inflation, even if it comes with short-term economic costs. This policy focus should mean that inflation does not become entrenched, and a period of higher rates should ensure that investment is not directed to nonproductive areas, and that capital is allocated more efficiently in the long term.


Monetary policy could become politicized

Central banks may come under increasing political pressure to relax policy early, particularly if economic pain begins to mount. In some instances, governments may enact fiscal policy that directly or indirectly counteracts central bank objectives. This could prolong the current economic adjustment period and lead to currency and economic volatility at a local level.

A secular transition to green energy will spur investment.

The global transition to clean energy and net-zero carbon emissions was already well underway as we entered this decade, but Russia’s invasion of Ukraine has heightened the need for investment for national security reasons. While we think we will see continued reliance on fossil fuels in the decade ahead, driven by strong demand for energy and relatively low current supply of alternatives, in the longer term the race to create a greener economy should boost growth. Greater investment in industrial metal and agricultural production may also be required, given a likely increase in demand for transition metals and for food, creating investment opportunity for all investors, not just those focused on sustainability.


The green transition could prove inflationary

Skills and materials that help achieve the green transition will remain in high demand over the coming years, and the need for energy security only exacerbates the potential for shortages that may drive energy and commodity prices higher. Policies that try and put a price on environmental externalities could lead to higher inflation for a number of years.

The era of security will drive public spending on infrastructure and R&D

We are entering an era of security where countries are increasingly focused on achieving self-sufficiency in strategically important areas such as energy and food production, technological development, and national security. Measures like the US CHIPS Act (aimed at boosting semiconductor R&D and manufacturing) and Inflation Reduction Act (in part aimed at promoting clean energy) will stimulate public and private spending over the coming years.


The era of security could intensify deglobalization

While the era of security could boost investment and R&D, it might also sacrifice efficiencies, lowering potential economic growth. The reestablishment of trade barriers in pursuit of national security would do the same and could also contribute to higher inflation.

The digitalization of business models is likely to gain momentum

The past two-and-a-half years have demonstrated that companies can deploy technology to run their businesses in ways thought inconceivable before the pandemic. Looking ahead, entire business models will increasingly be built around digitalization, potentially resulting in greater efficiency gains. Amid concerns about elevated inflation, it is worth noting that digitalization can be a disinflationary force.


Digitalization could spur labor and popular discontent

Technological transformation can bring about economic and societal challenges. Capital-intensive and “labor-lite” innovations could concentrate wealth in fewer hands, potentially stimulating populist narratives. It is also worth monitoring how the recent changes in working arrangements will affect labor force participation and productivity in the long term.

Investing in the decade ahead

Despite heightened risks to the near-term outlook, lower equity valuations and higher bond yields should also be supportive of stronger returns for diversified portfolios over the decade ahead.

Government bonds

Government bond yields increased sharply in 2022 as investors repriced the outlook for interest rates.


But while painful for investors in 2022, this bodes well for longer-term returns on government bonds, in our view. Historically, current yields have been good indicators of expected returns in local-currency terms. And, given large financing needs for infrastructure spending, we think real rates are likely to be higher in the coming decade than in the past one. As we expect inflation to move lower over the medium term, the correlation between stocks and high-quality bonds should turn negative again, stabilizing traditional portfolio diversification.

Credit

Yields on corporate credit have increased even more than government bond yields so far in 2022, amid worries about slowing economic growth.


Although near-term risks are elevated, current credit spreads are wide relative to long-term averages, suggesting a potentially attractive return outlook for investors over a multiyear horizon. And as pressures from tighter US monetary policy fade, we also see good potential for long-term returns in high yield credit and emerging market bonds.

Equities

Most equity markets declined considerably in 2022, driving valuations much lower.


The forward price-to-earnings ratio of the MSCI All Country World Index fell from 18.6 times at the beginning of the year to 14.1 times at the end of October, 3% below the 20-year average of 14.6 times. Based on historical data, current valuations would be consistent with 10-year returns in the 8–10% range, versus 10-year average annualized returns of 7.4% over the last decade. We note that profit margins are high by historical standards, and higher interest rates, taxes, and commodity prices, along with investments in supply chain security, could dampen margins in the future. Nonetheless, we think the expected long-term return for equities has improved over the past year.

Alternatives

Hedge funds fared better than equities and bonds in the first 10 months of 2022.


Looking ahead, we think hedge fund returns will benefit from higher interest rates and higher expected returns in traditional asset classes, and hedge funds will continue to play a key role in reducing risk and adding diversification to a multi-asset portfolio. Meanwhile, the fall in public markets may lead to delayed markdowns in net asset values in private equity. But we continue to see the potential for private market investments to deliver a longer-term return premium over public market investments. Our analysis of Cambridge Associates data going back to 1995 found that private market vintages launched the year after a peak drawdown in public markets delivered an internal rate of return of 18.6%, versus 14.8% for funds launched the year of a peak and 11.4% for funds launched the year prior.

Commodities

Over the past two years, broad commodity investments have delivered strong performance and provided significant diversification benefits for multi-asset portfolios.


In the longer term, we think the sustained growth in demand for energy, food, and transition metals, and the focus on energy sustainability and security, should continue to support prices. We favor an active approach when investing in commodities to manage the high level of cyclicality of the asset class, as well as to exploit opportunities coming from the diversity of individual commodity performance. Portfolio exposure to rising commodity prices can also be achieved indirectly, through investments in equity sectors, or through countries and currencies with high commodity exposure.

Currencies

The US dollar strengthened considerably in 2022, driven by the large increase in US interest rates and the currency’s status as a safe-haven asset.


While we expect the dollar to remain strong as we enter 2023, over the medium term we expect it to depreciate; it is overvalued by around 30% in purchasing power parity terms versus major currencies like the Swiss franc, the euro, the yen, and sterling. Given the yen’s and pound’s significant undervaluation and the export-oriented nature of the Japanese and UK equity markets, we choose not to hedge our currency exposure to either of those markets.

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

–Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.

–Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.

–Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.

–Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.

–Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.

Key investment ideas

2022 in review

Four things we got right

  • Look beyond mega-cap tech
  • The US dollar would strengthen and gold would fall
  • Energy equities and hedge funds would help shield portfolios
  • Crypto is an "entertainment" trade, not an investment

Four things we got wrong

  • We did not expect the Russia-Ukraine war
  • Inflation would fall
  • Monetary policy would tighten modestly
  • Bond yields would rise slightly

Here is what happened as a result:

Asset class forecasts

Developed market currencies

 

 

Spot

Spot

Mar 23

Mar 23

Jun 23

Jun 23

Sep 23

Sep 23

Dec 23

Dec 23

PPP

PPP

 

EURUSD

EURUSD

Spot

1.03

Mar 23

0.96

Jun 23

0.98

Sep 23

1.00

Dec 23

1.04

PPP

1.30

 

USDJPY

USDJPY

Spot

140

Mar 23

155

Jun 23

150

Sep 23

140

Dec 23

135

PPP

62

 

GBPUSD

GBPUSD

Spot

1.17

Mar 23

1.10

Jun 23

1.13

Sep 23

1.16

Dec 23

1.21

PPP

1.59

 

USDCHF

USDCHF

Spot

0.95

Mar 23

0.97

Jun 23

0.94

Sep 23

0.92

Dec 23

0.88

PPP

0.76

 

EURCHF

EURCHF

Spot

0.98

Mar 23

0.93

Jun 23

0.92

Sep 23

0.92

Dec 23

0.91

PPP

0.99

 

EURGBP

EURGBP

Spot

0.88

Mar 23

0.87

Jun 23

0.87

Sep 23

0.86

Dec 23

0.86

PPP

0.82

 

AUDUSD

AUDUSD

Spot

0.67

Mar 23

0.67

Jun 23

0.70

Sep 23

0.72

Dec 23

0.74

PPP

0.68

 

USDCAD

USDCAD

Spot

1.33

Mar 23

1.35

Jun 23

1.32

Sep 23

1.28

Dec 23

1.26

PPP

1.19

 

EURSEK

EURSEK

Spot

10.82

Mar 23

11.50

Jun 23

11.20

Sep 23

10.94

Dec 23

10.60

PPP

10.09

 

EURNOK

EURNOK

Spot

10.34

Mar 23

10.50

Jun 23

10.00

Sep 23

9.80

Dec 23

9.50

PPP

11.23

Source: UBS, as of 14 November 2022

Emerging market currencies

 

 

Spot

Spot

Mar 23

Mar 23

Jun 23

Jun 23

Sep 23

Sep 23

Dec 23

Dec 23

 

USDCNY

USDCNY

Spot

7.04

Mar 23

7.30

Jun 23

7.10

Sep 23

7.00

Dec 23

6.90

 

USDIDR

USDIDR

Spot

15,517

Mar 23

15,700

Jun 23

15,500

Sep 23

15,300

Dec 23

15,300

 

USDINR

USDINR

Spot

81.3

Mar 23

83.0

Jun 23

82.0

Sep 23

81.0

Dec 23

81.0

 

USDKRW

USDKRW

Spot

1,326

Mar 23

1,400

Jun 23

1,360

Sep 23

1,320

Dec 23

1,280

 

USDBRL

USDBRL

Spot

5.32

Mar 23

5.00

Jun 23

5.00

Sep 23

5.00

Dec 23

5.00

 

USDMXN

USDMXN

Spot

19.40

Mar 23

20.50

Jun 23

21.00

Sep 23

21.50

Dec 23

21.50

Source: UBS, as of 14 November 2022

Commodities

 

 

Spot

Spot

Mar 23

Mar 23

Jun 23

Jun 23

Sep 23

Sep 23

Dec 23

Dec 23

 

Brent crude oil (USD/bbl)

Brent crude oil (USD/bbl)

Spot

93.1

Mar 23

110.0

Jun 23

110.0

Sep 23

110.0

Dec 23

110.0

 

WTI crude oil (USD/bbl)

WTI crude oil (USD/bbl)

Spot

85.8

Mar 23

107.0

Jun 23

107.0

Sep 23

107.0

Dec 23

107.0

 

Gold (USD/oz)

Gold (USD/oz)

Spot

1,777

Mar 23

1,600

Jun 23

1,600

Sep 23

1,600

Dec 23

1,650

 

Silver (USD/oz)

Silver (USD/oz)

Spot

22.1

Mar 23

18.0

Jun 23

18.0

Sep 23

18.0

Dec 23

19.0

 

Copper (USD/mt)

Copper (USD/mt)

Spot

8,375

Mar 23

9,000

Jun 23

9,500

Sep 23

9,500

Dec 23

9,500

Source: UBS, as of 14 November 2022

Rates and bonds

 

 

Current*

Current*

2023E*

2023E*

2024E*

2024E*

Spot**

Spot**

Jun 23**

Jun 23**

Dec 23**

Dec 23**

 

USD

USD

Current*

4.00

2023E*

4.30

2024E*

3.32

Spot**

3.85

Jun 23**

3.50

Dec 23**

3.00

 

EUR

EUR

Current*

1.50

2023E*

2.81

2024E*

2.43

Spot**

2.15

Jun 23**

1.95

Dec 23**

1.95

 

CHF

CHF

Current*

0.50

2023E*

1.35

2024E*

1.50

Spot**

1.07

Jun 23**

1.25

Dec 23**

1.25

 

GBP

GBP

Current*

3.00

2023E*

4.41

2024E*

3.85

Spot**

3.37

Jun 23**

3.20

Dec 23**

2.90

 

JPY

JPY

Current*

-0.10

2023E*

0.11

2024E*

0.24

Spot**

0.24

Jun 23**

0.25

Dec 23**

0.35

* Base rates
** 10-year yields (%)
E = Estimate
Note: Base rates refer to market pricing.
Source: UBS, as of 14 November 2022

Economic forecasts

GDP growth (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

Developed markets

Developed markets

2021

5.2

2022E

2.4

2023E

0.4

2024E

0.8

2025E

2.1

 

Emerging markets

Emerging markets

2021

7.3

2022E

3.8

2023E

3.5

2024E

4.2

2025E

4.3

 

World

World

2021

6.3

2022E

3.2

2023E

2.1

2024E

2.7

2025E

3.3

E = Estimate
Source: UBS, as of 8 November 2022

Americas GDP growth (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

US

US

2021

5.9

2022E

1.9

2023E

0.1

2024E

0.3

2025E

2.7

 

Brazil

Brazil

2021

4.6

2022E

2.8

2023E

1.3

2024E

2.5

2025E

2.2

 

Canada

Canada

2021

4.6

2022E

3.0

2023E

-0.6

2024E

0.3

2025E

0.3

E = Estimate
Source: UBS, as of 8 November 2022

Europe GDP growth (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

Eurozone

Eurozone

2021

5.3

2022E

3.2

2023E

0.2

2024E

0.8

2025E

1.1

 

– Germany

– Germany

2021

2.6

2022E

1.7

2023E

-0.5

2024E

0.7

2025E

1.0

 

– France

– France

2021

6.8

2022E

2.5

2023E

0.4

2024E

0.9

2025E

1.4

 

– Italy

– Italy

2021

6.7

2022E

3.7

2023E

0.4

2024E

1.0

2025E

0.9

 

– Spain

– Spain

2021

5.5

2022E

4.7

2023E

1.4

2024E

2.1

2025E

1.8

 

UK

UK

2021

7.5

2022E

4.3

2023E

-0.5

2024E

0.6

2025E

1.5

 

Russia

Russia

2021

4.7

2022E

-3.2

2023E

-3.0

2024E

0.8

2025E

1.3

 

Switzerland

Switzerland

2021

4.2

2022E

2.1

2023E

0.4

2024E

1.0

2025E

1.8

E = Estimate
Source: UBS, as of 8 November 2022

Asia GDP growth (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

China

China

2021

8.1

2022E

3.1

2023E

4.5

2024E

4.8

2025E

4.6

 

Japan

Japan

2021

1.7

2022E

1.5

2023E

1.0

2024E

1.2

2025E

1.5

 

India

India

2021

8.7

2022E

6.9

2023E

5.5

2024E

6.0

2025E

6.0

 

South Korea

South Korea

2021

4.1

2022E

2.5

2023E

1.1

2024E

1.7

2025E

2.5

E = Estimate
Source: UBS, as of 8 November 2022

Inflation (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

Developed markets

Developed markets

2021

3.2

2022E

7.1

2023E

3.7

2024E

1.9

2025E

1.8

 

Emerging markets

Emerging markets

2021

4.7

2022E

9.7

2023E

7.0

2024E

4.8

2025E

4.3

 

World

World

2021

4.0

2022E

8.6

2023E

5.6

2024E

3.6

2025E

3.2

E = Estimate
Source: UBS, as of 8 November 2022

Americas inflation (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

US

US

2021

4.7

2022E

8.1

2023E

3.6

2024E

1.9

2025E

1.8

 

Brazil

Brazil

2021

8.3

2022E

9.3

2023E

4.1

2024E

3.3

2025E

3.0

 

Canada

Canada

2021

3.4

2022E

6.8

2023E

3.1

2024E

1.6

2025E

1.5

E = Estimate
Source: UBS, as of 8 November 2022

Europe inflation (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

Eurozone

Eurozone

2021

2.6

2022E

8.5

2023E

5.3

2024E

2.2

2025E

2.0

 

– Germany

– Germany

2021

3.2

2022E

8.8

2023E

5.4

2024E

2.0

2025E

1.8

 

– France

– France

2021

2.1

2022E

6.0

2023E

4.2

2024E

1.6

2025E

1.5

 

– Italy

– Italy

2021

1.9

2022E

8.7

2023E

6.1

2024E

1.9

2025E

2.0

 

– Spain

– Spain

2021

3.0

2022E

8.5

2023E

3.0

2024E

1.9

2025E

1.8

 

UK

UK

2021

2.6

2022E

8.9

2023E

5.3

2024E

2.3

2025E

2.1

 

Russia

Russia

2021

6.7

2022E

13.8

2023E

4.6

2024E

4.2

2025E

4.4

 

Switzerland

Switzerland

2021

0.6

2022E

2.9

2023E

2.1

2024E

1.3

2025E

1.3

E = Estimate
Source: UBS, as of 8 November 2022

Asia inflation (%)

 

 

2021

2021

2022E

2022E

2023E

2023E

2024E

2024E

2025E

2025E

 

China

China

2021

0.9

2022E

2.1

2023E

2.0

2024E

1.8

2025E

2.2

 

Japan

Japan

2021

-0.2

2022E

2.4

2023E

1.1

2024E

1.7

2025E

1.0

 

India

India

2021

5.5

2022E

6.7

2023E

5.2

2024E

5.1

2025E

5.2

 

South Korea

South Korea

2021

2.5

2022E

5.1

2023E

3.4

2024E

2.1

2025E

2.3

E = Estimate
Source: UBS, as of 8 November 2022