Cazenove Capital Cautious On Equities In 2023

Amanda Cheesley Deputy Editor London 22 December 2022

Cazenove Capital Cautious On Equities In 2023

Christopher Lewis, head of investment strategy at wealth manager Cazenove Capital, part of the Schroders Group, shares his economic outlook and investment strategy for 2023.

Christopher Lewis at Cazenove Capital outlined his views this month on the global economy, inflation, interest rates, and corporate earnings in 2023, highlighting how this will impact investment strategy across equities, fixed income, alternatives and cash.

"Central bankers may start to sound less anxious about inflation in 2023. But investors must still contend with higher interest rates and a deteriorating economic backdrop as the US and other developed markets fall into recession," he said in a statement.

The firm’s base case is for developed markets to fall into recession in 2023 before rebounding in 2024. Inflationary pressures could remain elevated in the UK, Lewis continued, but US inflation could fall faster given greater self-sufficiency in both energy and agriculture.

In the near term, he expects interest rates to move slightly higher in both the US and UK. However, rate cuts could be on the cards in late 2023 as central banks shift their focus to supporting economic growth.

On corporate earnings, analyst expectations remain too optimistic. Earnings and margins could come under pressure as the global economy slows, Lewis said.

Investment strategy

The wealth manager believes that the peak in inflation could have been reached, but a peak in interest rates could still be some way off, suggesting that it is still too early to add to equities for now. The firm remains underweight in equities, given elevated near-term uncertainty. Within equities, it prefers large-cap, higher-quality companies that are better positioned for a challenging environment. Nevertheless, a peak in US interest rates and an end-to-earnings' downgrade could prompt the firm to increase its exposure. 

Fixed income 
The wealth manager is neutral on fixed income and sees increasing opportunity in both corporate and government bonds. Nominal government bonds have attractive defensive characteristics, the firm said, in a more challenging economic environment. It has a preference for short-dated bonds in the near term and favours US Treasuries, given that the US is probably nearer a peak in interest rates than other markets. 

On credit, the wealth manager said yields look attractive relative to other asset classes. It prefers shorter-duration and higher-quality credit in the near term. There is the potential for spreads to widen if corporate earnings deteriorate, the firm said. Investment grade credit looks relatively attractive. USD corporate bonds now offer a yield of just under 5.5 per cent, it added. 

Credit spreads (the excess that companies have to pay to borrow over government bonds) have widened and are now back at around long-term averages suggesting that valuations are more appealing, the firm said. Meanwhile, leverage metrics, which reflect how much companies have borrowed relative to their cash flow, are not at excessive levels. As with government bonds, it believes that it makes sense to focus on shorter-dated higher quality credit at this stage.

The wealth manager remains positive on alternatives as diversifying assets and sees good longer-term opportunities in areas including real assets and commodities.

Long-dated revenue streams and income characteristics remain attractive in select parts of the market. The firm sees good opportunities in renewables, digital infrastructure, specialist property and exposure to private companies. Valuations are attractive following recent market volatility, it said.

Where appropriate, the wealth manager believes that private equity should now be playing a role in diversified private client portfolios.

Maintaining an elevated cash position in the near term to take advantage of tactical opportunities is also favoured by the firm. 

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