(Bloomberg) -- Some of the world’s biggest investors predict that stocks will see low double-digit gains next year, yet the path to a rebound won’t be a straight line.
Amid recent optimism that inflation has peaked — and that the Federal Reserve could soon start to change its tone — 71% of respondents in a Bloomberg News survey expect equities to rise, versus 19% forecasting declines.
The informal survey of 134 fund managers incorporates the views of major investors including BlackRock Inc., Goldman Sachs Asset Management and Amundi SA and was conducted between Nov. 29 and Dec. 7. It provides an insight into the big themes and hurdles they expect to be grappling with in 2023 after inflation, the war in Ukraine and hawkish central banks battered equity returns this year.
Last year, a similar survey predicted that aggressive policy tightening by central banks would be the biggest threat to stocks in 2022.
Here are the main points of the survey:
Those who expect global shares to rise see an average 10% gain for 2023. That is in line with the average historical return of the MSCI All-Country World Index, yet looks modest given previous rebounds such as 2009 or 2019 where equities gained more than 30% and 20% respectively.
Investors remain cautious for the start of the year and predict that stock market gains will be skewed to the second half of 2023. When it comes to specific sectors, respondents generally favored companies that can defend earnings through an economic downturn. Dividend payers and insurance, health care and low volatility stocks were among their picks.
The biggest threats to a potential recovery are somewhat interlinked, with stubbornly high inflation or a deep recession ranking high on investors’ watch list, cited by 48% and 45% of participants, respectively.
Clues about the path forward might came as early as next week where a frenzy of headline risks are awaiting investors, including US consumer-price data for November as well as rate decisions and commentary from both the Federal Reserve and the European Central Bank.
After being hammered this year as interest rates climbed, US technology stocks may also come back in favor, according to the survey. More than half of respondents said they’d buy the sector.
Those in favor note valuations are relatively cheap despite the recent rally and bond yields are expected to fall next year. Yet sentiment is shifting away from a broad “buy growth” approach as many participants suggest being very selective when going back into the segment, putting money only on those companies that have established business models and resilient financials even in an economic downturn.
Some 60% of the investors are bullish on China, particularly as it moves away from Covid zero. A slump earlier this year has put valuations well below their 20-year average, making them more attractive compared with US or European peers.
Political and regulatory risks are too big for those advising to stay away from the region. And similarly to big tech, the bulls suggest being very selective, when it comes to picking stocks.
For fund managers, better news on inflation and growth could be catalysts for a stronger performance. Almost 70% of respondents said they were the main potential positive factors. They also cited a full China reopening and a ceasefire in Ukraine as upside triggers.
The emphasis on inflation and growth as the make-or-break elements is in line with the findings of Bank of America Corp.’s latest fund manager survey. It showed recession expectations were at the highest since April 2020, while a “stagflation” scenario of low growth and high inflation was “overwhelmingly” the consensus view.
The constructive view of money managers is at odds with what Wall Street is predicting. In separate Bloomberg surveys of strategists, gains of less than 2% for Europe and a meager 1% for the US stock market are forecast.
Central banks’ aggressive monetary policy, leading to a weakening of global growth momentum in the first half of 2023, is one of the main arguments cited by strategists for anticipating an essentially flat stock market next year. However, they foresee the impact on equities will be partly offset by a decline in real bond yields.