To The Moon

Keypoints：

• 2023 Outlook for the US Stock Market
• 2023 Outlook for Hong Kong Stocks
• 2023 Outlook for European and Japan stocks markets
• 2023 Outlook for Emerging Market Equities
• 2023 Outlook for US Treasuries
• 2023 Outlook for Bonds outside the US
• 2023 outlook for Gold and Commodities

Recommend to Read: 

Panning for Gold I: 2022 major global assets performances review

Panning for Gold II: US, Eurozone, China 2023 Economic Outlook

Panning for Gold III | Semiconductor & New Energy Industries Under Deglobalisation

1. 2023 Outlook for the US Stock Market：

U.S. stocks $S&P 500(.SPX)$ will be dominated by significant volatility throughout 2023 without a unilateral bull or bear market. The Russell 2000 $iShares Russell 2000 ETF(IWM)$ , a small-cap index that is less affected by deglobalisation, is expected to lead the U.S. stocks to the upside; while the Nasdaq 100, which is dominated by giant technology stocks, will remain on the weak side.

Many institutions are worried that the potential recession next year may increase downward pressure in stock market due to worse earning reports; they tend to think that US stocks will goes down first and then goes upside. Our institution agree that the poor earning reports will be another bearish news in this bearish cycle, while possibly not appearing in the first half of 2023. U.S. economic growth is still resilient; the FED rate hikes may topped in the first half of 2023 combined with China's reopening will bring positive news to the global economy nearly sliding into recession, or will drive the U.S. stocks up first.

The Fed will raise rates up to the peak in Q1, but may raise its average inflation target to 3% in the second half of 2023 because of continued tightness in the job market, preparing for a rapid shift to rate cuts thereafter. The day the Fed turns to cut interest rates is likely to be the day the U.S. recession hits, pushing U.S. stocks down due to worse earning reports. The current bear market since 2022 will reach the bottom after the large drop caused by poor earning reports.

Reasons for supportive basics：

• Russell 2000$iShares Russell 2000 ETF(IWM)$ , composed of small-cap component companies, whose revenues are concentrated in the U.S., are less exposed to chain shifts and geopolitical risks triggered by deglobalisation, while $NASDAQ(.IXIC)$ component companies are under the opposite condition.
• Meanwhile, when valuations are measured by Foward PE, the small-cap Russell 2000 is around 44% historical quartile since 1995, while the large-cap $S&P 500(.SPX)$ is at 58% historical quartile, giving small-cap stocks a better valuation safety zone in the coming 2023.
• In addition, the $NASDAQ 100(NDX)$ is currently moving at a higher level relative to the Russell 2000 than the historical trend line, with the mean reversion from de-globalisation continuing.

Source: Bloomberg & Tiger Trade

• Since 1990, the average downward revisionin earning performance from the U.S. recession was 25.61% and the average length of time was 327 days. The current downside revision of the $S&P 500(.SPX)$ EPS for the next 12 months is only about 6.5%, and only about 170 days after the high of early July 2022, which means the level of downside is not enough in magnitude and duration and the earnings downward adjustment is not sufficient.

Source: Bloomberg & Tiger Trade

However, Wall Street analysts tend to revise downward earnings estimates for the current quarter two months before each quarter. According to FactSet, over the past 10 years, it has been 2.7% of the average downward earnings revision for the first two months of each quarter; but in the first two months of Q4 2022, the downward earnings revision has been as high as 5.6%, which means the market's expectations for next January's earnings season are already very low.

If the U.S. stock's 2022 Q4 earnings report is better than expectations, combined with the Fed's topping out of interest rate hikes and China's reopening expectations, the momentum of the rapidly downward revisions of company earnings is expected to be temporarily reversed, only to re-accelerate downward revisions in the second half of 2023.

The U.S. job market possibly have experienced a long-term employment gap. In a speech titled "Inflation and the Labor Market" on Nov. 30, Powell made it clear that the labor shortage in the post-epidemic era is unlikely to be fully repaired in the near future. The FED’s monetary policy cannot affect the supply of labor, but acts on the demand side to make companies reduce hiring without immediate effects. In the December FOMC post-meeting press conference, Powell also said that other companies, excluding the wave of layoffs from technology companies, are very reluctant to lay off workers because it is too difficult to recruit people.

As a result, the strong stickiness of wage inflation possibly makes the 2% average inflation target no longer applicable for the next five years. Confronted by prolonged high interest rates, the long-term operating habits developed by companies during periods of low interest rates are likely to trigger a U.S. recession eventually , forcing the Federal Reserve to turn to lower interest rates.

Source: The Federal Reserve

2. 2023 Outlook for Hong Kong Stocks

Hong Kong stocks will have great potential to repair valuation and performance, enjoying good share price gains in 2023.

• Valuation side: The Fed has confirmed to slow the tightening pace, easing global market liquidity pressure; the performance of the Hong Kong stock market is highly correlated with the global liquidity environment, with the valuation of Hong Kong stocks being at a historical low.
• Earnings side: With the re-opening of China and easing regulatory policies in the Internet and real estate industry, revenue expectations from Hong Kong weighted stocks have improved significantly in 2023. The sectors including tourism, catering and other consumer sectors, Internet technology and domestic housing, which continued to be under pressure in the last two years, all welcome great potential to repair and boom in 2023.

However, under the influence of global monetary tightening,deglobalisation, and board and domestic strategic conflicts, it should be noted that the capital and fundamentals of Hong Kong stocks have changed dramatically, making it difficult for the long-term valuation pivot to return to the high position in 2020-2021.

• TheImproved fundwill help valuation rebound: Hong Kong, as an offshore mainland market under the linked exchange rate system, its stock market performance is highly correlated with the US dollar. In 2022, the Federal Reserve implemented exceedingly-expected tightening policy, leading the dollar index rise sharply; Hong Kong stocks also suffered a lot. With the Fed rate hike nearing its peak, the dollar is also expected to continue to fall with liquidity pressures eased. In addition, the auditing issues have also led to significant numbers of large-cap US-listed Chinese companies returning to Hong Kong, grabbing liquidity from Hong Kong stocks that already suffered the liquidity shortage. Substantial progress in the settlement of the auditing issue will be a feel-good factor for the capitalization of Hong Kong stocks.

Source: Bloomberg& Tiger Trade

Source: Bloomberg& Tiger Trade

• The recovery of economy benefits the company's earning performance: With the optimization of domestic policy for epidemic control and economic revival, it will drive the joint production recovery and consumption rebound in the Mainland and Hong Kong, which will be a significant benefit to the earnings performance of both local and Mainland companies in Hong Kong stocks. According to the top 5 weighted stocks in the Hang Seng Index and the Hang Seng TECH Index, the consensus expectation is that there will be an improvement next year despite the huge challenges to earnings growth in 2022. From the perspective of economic revival, we can focus on tourism and other consumer sectors, which are expected to boom under performance repair.

Source: Bloomberg& Tiger Trade

• The easing regulatory policies for the Internet and Real estate industry: Internet companies in Mainland have a pivotal impact on the HSI and the Hang Seng Technology Index; domestic housing stocks also cover a considerable proportion of the HSI. These sectors have been subject to severe regulatory restrictions in the past few years due to long-term national strategies. But easing policies have been implemented, such as the real estate "three arrows" policy (three methods to help real estate companies finance), the State Council repeatedly issued a document to support the platform economy and the game version number reopened the normal issuance. Under the domestic full stimulation of the economyin 2023, these industries will usher in greater policy support and regulatory easing, changing the stagnant performance and valuation.
• Long-term valuation center moved down, Hong Kong stocks difficult to return to the high: the first is the capital side.The previous peak of Hong Kong stocks is caused by global synchronous easing, Even if there is a recession in the United States, which is limited by the domestic and foreign economic, inflation and political environment, it will be difficult for the Fed to relax infinitely again in the short term after this wave of austerity. In the context of deglobalisation, the political and financial environment in the West that restricts and discredit Hong Kong in the past 2 years has led to a serious outflow of foreign capital and talents. It's difficult for Europe and the United States to restore their confidence in Hong Kong's "free port" in a short time, and will affect the value of Hong Kong stocks for a longer period of time. The second is the fundamentals.The original development model of the Internet, real estate and other sectors conflicts with the country's long-term strategy. Although promoting the economy in the short term will relax relevant regulation, in the long run, the high profits and high growth of these industries in the past will not be sustainable, and it will be difficult for future performance to support previous high valuations.

3. 2023 Outlook for European and Japan stocks markets:

Europe: with the gradual easing of the conflict between Russia and Ukraine, the European stock market has been greatly improved in Q4 this year. Yet Europe lags behind the US in terms of growth prospects and what the ECB can do to deal with inflationary pressures. We expect Europe to continue to be a weak link in the global market in 2023.

Japan: the era of low interest rates in Japan is expected to end in 2023, casting a shadow over the performance of the Japanese stock market. Fortunately, valuations of the Japanese stock market as a whole are still at historic lows, and the real risk of a sharp decline is expected to come from the recession.

Source: Bloomberg& Tiger Trade

4. 2023 Outlook for Emerging Market Equities:

The reopening of China is helping to repair the performance of previously stressed consumption and real estate, thereby boosting demand for industrial metals exports from resource countries in emerging markets. In the context of de-globalisation, the politically stable and neutral resource countries in emerging markets are expected to continue to make a fortune, and their stock markets are expected to continue their excellent performance in the first half of next year. In the second half of the year, as Europe and the United States move closer to recession, emerging markets that are more volatile than U. S. stocks will also face a sharper decline.

5. 2023 Outlook for US Treasuries:

We expect the Fed to raise interest rates for the last time in march 2023, bringing the benchmark interest rate to 5%-5.25%, and may cut interest rates by the end of the year because of the recession. According to this path, the reasonable pricing of interest rates on two-year Treasuries next year should fluctuate between 3.5% and 4.5%, with an obvious downward trend in the second half of the year. Interest rates on 10-year Treasuries are unlikely to break through this year's 4.33%. When they rise above 4% next year, there will be a good configuration safety basis, and the downside depends on the extent of the US recession. Overall, US Treasuries for the whole year are expected to be dominated by range shocks, and it is not appropriate to buy wildly when stock prices rise and sell heavily when they fall.

Bonds issued by high-quality companies generally have allocation value. Based on the company's financial statements and operating conditions, we can correctly judge its credit risk.

6. 2023 Outlook for Bonds Outside the US:

The last samurai of the era of global central bank easing may surrender, and this will be the gray rhino(A potential crisis with high probability and high impact) of the global bond market in 2023. As Japan's core CPI has been above 2% for five months in a row since May this year, and the upward momentum is rapid, if it cannot be alleviated in the next few months, it may trigger the BoJ to move from abolishing YCC to raising interest rates when the BoJ leadership changes in April next year.

Against the backdrop of rising interest rates, Japanese bonds are expected to replicate the dismal performance of US Treasuries this year.

In addition, with interest rates on Japanese bonds rising and inflationary inflection points in Europe still lagging behind those in the US, there is still room for further upward growth.Emerging market government bonds are expected to benefit from the peak of the dollar. Brazil's central bank, which raised interest rates a year ahead of the Fed, peaked in the third quarter of this year; India and Mexico are expected to peak at Q1, and emerging market government bonds are expected to have good yields in the first half of next year.

7. 2023 outlook for Gold and Commodities :

The US and most developed countries are in a period of stagflation, which makes global stocks and bonds face greater uncertainty, while gold and commodities have historically been the beneficiaries of stagflation.

We expect that the strong stickiness of recession and inflation, coupled with the inability to eliminate geopolitical risks, will make gold a core asset allocation in 2023.

For gold, which has far more monetary attributes than commodity attributes, its rising logic is reflected in two aspects: one is the decline in real interest rates and economic growth expectations, and the other is the impact on the status of the dollar as a global currency, the reasons include the widening US fiscal deficit or the inability of the Fed to control inflation. This year, the Fed raised interest rates more than expected to stabilize long-term inflation expectations, resulting in a significant rise in real interest rates in the United States, and the continued strength of the dollar, so gold is under pressure.

By 2023, with the Fed raising interest rates at its peak, and the extent and time of downward revision of US stock earnings are far from enough, the upward space of real interest rates is far less than the downward space. At the same time, in the context of deglobalisation, geopolitical conflicts will continue one after another, add in the prospect of a higher average inflation target from the Fed and a shift to fiscal and monetary easing in the US to rescue the recession, and the logic of gold's steady rise throughout the year is the clearest of any asset class in the world. The risk is that the US economy is too strong to achieve a soft landing even if the Fed continues to raise interest rates by more than 5% than expected and remains above 5%.

Source: World Gold Council & Tiger Trade

Source: World Gold Council & Tiger Trade

We are also bullish on silver as a commodity in 2023. Silver has a similar precious metal monetary property to gold, so it has a certain correlation with the trend of gold. At the same time, the industrial use of silver is expanding, with demand for both photovoltaic and new-energy car batteries rising year by year. The risk is that the global economy is heading for recession, dampening demand for new energy expansion in the short term.

Industrial metals, notably copper, will benefit from a boost to demand from China's reopening and stabilisation of property. However, after the repeated impact of COVID-19 in 2022, the boost to China's domestic demand is likely to be tortuous and slow. If Europe and the United States enter recession in the second half of the year, industrial metals, which are the most sensitive to economic cycles in history, will also see a sharp decline. However, in a resource-king deglobalisation scenario, we remain bullish on the long-term post-recession performance of industrial metals, which is likely to occur in late 2023 to early 2024.