Despite some potholes along the way, global equities should improve through 2023, says John Vail, chief global strategist at Nikko Asset Management.
We don’t expect smooth sailing for the global economy and markets, but there should be great relief for stocks in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.
Of course, there are a plethora of risks that must be navigated, some the most challenging since the end of World War II. But due to improving global monetary policy prospects, lower bond yields, the avoidance of deep recession and China’s pivots, we shift to a positive view on global equities for 2023. Therefore, investors should not be distracted by occasional potholes unless the scenario ahead is likely to be durably altered by such.
Aggregating our national forecasts from our base date, we forecast that the MSCI World Total Return Index in USD terms will be +7.2% through March, +11.1% through June and +12.7% by December (+3.9%, +6.1% and +4.2% in yen terms).
In the US, the SPX’s PER on its CY22 consensus EPS estimate is 17.5 (and 16.4 for 2023), which is high, especially given present bond yields, and earnings reports and guidance ahead will likely be disappointing, especially to short-term investors and algorithm models; however, buybacks remain fairly strong, but the improving intermediate-term macro outlook, and a less hawkish Fed turning full dovish by the 4Q, should encourage investors. We do, believe, however, that concerns about valuation and the economy in 2024 will subdue sentiment by year-end.
In sum, we expect the SPX to rise to 4,069 (7.0% total unannualised total return from our base date) at end-March, 4,188 in June (10.5% return) and 4,145 at end-December (10.3% return), with yen-based returns of 3.7%, 5.5% and 2.0%, respectively. Thus, the US is not expected to outperform in 2023.
Europe
European equities surged in the 4Q, especially in USD terms, after underperforming greatly in the 3Q. So far, the situation there has been less negative than anticipated despite the ECB turning very hawkish, which strengthened the euro. The Euro Stoxx PER, at 12.0 times CY22 EPS consensus estimates (and 11.8 for 2023) is somewhat below its historical average, and despite earnings and economic disappointments, investors will likely anticipate better times ahead. A key factor (along with, of course, the Russia-Ukraine situation) will be how pervasive labour strikes (and the resulting wage increases) are.
Thus, we expect the Euro Stoxx index to rise to 430 at end-March and the FTSE to 7,800, which translates to a total return of 8.1% (unannualised from our base date) for MSCI Europe through then in USD terms. Thereafter, we expect 12.8%, through June and 19.0% through December, greatly aided by a rebound in the euro, which argues for an overweight of the region.
Japan
Japanese equities were high performers in the 4Q in USD terms, rising 12% so far from June in USD terms (vs 6% for the SPX) and 3% in yen terms. Indeed, through 21 December, MSCI Japan in USD terms fell 16.1% year to date, outperforming the SPX’s -17.3%. Corporate profit margins hit new highs in the 3Q, and given the full re-opening of the economy (including inbound tourism), consumer optimism is rebounding. High inflation, which worried consumers, looks set to decline ahead, especially with the yen’s surge in recent days.
The auto sector, which is a major portion of the stock market and economy, will likely be hurt by the stronger yen and increasing doubts about the rebound in auto demand globally, while the global tech sector also is in a deep downturn, primarily as excess demand during the pandemic is reversed. But investor interest in financials and other domestic-oriented companies should be very strong.
So, overall corporate earnings face the yen headwind, but the economic re-opening, including in China after the 1Q, should offset most if not all of such. Notably, many Japanese exporters have hedged a good portion of their forex exposure for the next 3-6 months, so the yen effect will be gradual.
Meanwhile, Japan has low political risk and structural reform is continuing, especially in digitalisation and alternative energy. Japan’s low exposure to Russia is fortunate, and it secured its natural gas supplies from Sakhalin, so the country will continue to benefit the most from reasonable global commodity prices.
TOPIX’s PER is now 12.3 times its CY22 EPS consensus estimate, which is very low (and 11.9 for 2023). Also supporting the market are share buybacks, which are very strong, and the market’s dividend yield, which at 2.6% remains extremely attractive vs. bonds.
Thus, we forecast the TOPIX at 1,940 at end-March, 2,010 in June and 2,120 next December for total unannualised returns of 5.7% in USD terms (2.5% in yen terms), 11.2% (6.9% in yen terms) and 23.3% (14.0% in yen terms), respectively, from our base date through those periods. As for the Nikkei, it should hit 27,500, 28,500 and 30,000, respectively. These returns are obviously very attractive for both domestic and global investors.
Pacific-ex Japan
Developed Pacific-ex Japan MSCI: Australia should benefit from many commodity prices remaining at high levels, especially those geared to the rebound in China after the 1Q. Relations between the countries have entered a détente, which should greatly assist Australia, as well.
However, the domestic downturn in property prices is a headwind for many consumers due to the wealth effect, and for banks and construction firms too, so domestic economic growth should not surge in 2023.
Hong Kong’s stock market, which is dominated by PRC firms, rebounded sharply after China’s pivots and prospect of a revival in tourism. A weakened local property market certainly does not help, but less hawkish central banks after the 1Q (and the Fed potentially easing in the 4Q) should allow for some stabilisation in property and equity sentiment in 2023.
We expect the region’s MSCI index returns in USD terms (total unannualised) at 10.8% through March, 15.7% through June and +22.2% through next December.
