Invesco Outlook Calls for Central Banks to Pause in 2023, Paving the Way for a Recovery to Start

Invesco strategists are transitioning to a less defensive position within model asset allocations, as they believe markets are moving from a contraction regime towards a recovery regime
Central Banks are expected to pause tightening policies around mid-2023
European economy is at greater risk of recession than the US
From a regional perspective EM assets are preferred in a recovery regime
Real Estate is a favoured asset

Dubai – Gulf Tech:
Invesco, one of the world’s leading independent global investment management firms, recently released its macro and investment outlook for 2023 calling for financial markets to transition to a recovery regime in anticipation of central banks ending their respective tightening cycles, which is likely to lead to an eventual economic recovery. Invesco’s base case scenario anticipates a moderation of inflation, resulting in a pause in central bank tightening around mid- 2023.. We expect a rising global risk appetite to reflect a positive repricing of recession risks in terms of timing, duration or magnitude, while we continue to assess the full impact of past monetary policy tightening, with its long and variable lags
Invesco’s Kristina Hooper, Chief Market Strategist, believes that currently “Global economic growth is below trend and decelerating.”The global contraction is likely to be modest, though some economies may be hit harder than others, with the chances of a near-term recession in the US and Europe rising. However, as central bank tightening cycle pauses become imminent, “financial markets are likely to look ahead and begin to discount an economic recovery, which typically results in risk asset outperformance.”
A combination of monetary and fiscal expansion, supply chain disruptions, and energy market disruptions related to the war in Ukraine has pushed inflation to multi-year highs in many advanced economies over the last twelve months. Invesco’s outlook anticipates that, while tight labor markets are likely to keep upward pressure on inflation, other factors will work to bring inflation down including falling energy prices, easing supply chain pressures, and cooling demand. Inflation is expected to moderate with markets already anticipating a hold in central bank tightening around the middle of the year. . Invesco’s strategists believe that financial markets are already starting to shift to recovery regime behaviour, in which riskier assets have historically performed better.
Across regions, inflation in the US in particular is expected to decline but likely to remain above target. Emerging Markets are likely to benefit from a weakening US dollar on the back of a Fed pivot to pause its tightening cycle. Chinese growth is likely to improve given recent policy changes and exected support. The European economy is at greater risk of recession driven in part by the sanctions imposed on Russia and Belarus as well as the reduced economic activity in Ukraine. With Europe depending largely on Russia for its imports of energy, the region is susceptible to a sudden cut in supply. The higher price of gas across Europe has led to higher inflation, squeezing real incomes.
Looking at what this means for investors and asset allocation, Paul Jackson, Global Head of Asset Allocation Research at Invesco, says “From an asset performance perspective, we anticipate that the greater risk of recession in Europe will favor European defensive assets more than those of the US. A scenario under which global inflation remains more persistent than in the base case would prolong the negative performance of most assets with central banks pushing interest rates and bond yields higher while deepening and prolonging recession in Europe, reinforcing our preference for defensive assets in Europe.”
Given Invesco’s view that 2023 will be a year of financial market transition from a contraction regime to one of recovery, Invesco’s strategists are reducing the overall defensiveness of the Model Asset Allocation. A reduction in the allocation to government bonds to neutral has been offset by an increase in investment grade credit and high yield credit which often does well during periods of recovery. Further, the overweight allocation to cash could be replaced by an overweight allocation to gold, which may be helped by falling bond yields and a weakening dollar. Real Estate could benefit from generous yields and remains a favorite cyclical asset along with high yield credit. Jackson cautions: “The path of inflation will be critical for financial markets in 2023. The outlook for the global economy is largely dependent on central bank actions, and the path of monetary policy will rely on the path of inflation.”