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International Fund Managers' Top Trades for 2023

As inflation continues to rise and central banks hike interest rates around the globe, fund managers are considering which economic shifts will have the biggest impact in 2023.

Stacked Coins
Stacked Coins

Many predict that the reign of the "King Dollar" is ending and are positioning themselves accordingly. The dollar index, which tracks the performance of the US currency against other major currencies, gained over 15% from January to November 2022 as the Federal Reserve raised rates aggressively. However, experts expect the index to drop more than 10% in 2023 due to a peak in inflation and a shift in Fed policy. In addition, the sudden alteration of the Bank of Japan's "yield curve control" program, which has kept interest rates close to zero, could also strengthen the yen against the dollar.

Chinese Equities on the Rise

Investors are looking to Chinese equities as a potential comeback story, thanks partly to easing COVID-19 restrictions, a renewed focus on economic growth, and efforts to shore up the troubled property market. The MSCI China index saw gains of nearly 40% from November to mid-December, and some analysts believe there is still room for growth in sectors such as travel, domestic consumption, and technology. BNP Paribas, for example, has upgraded China to "overweight" in its 2023 model portfolio, citing stocks such as Tencent and as particularly promising.

Emerging Markets Make a Comeback

After experiencing some of the worst losses on record in 2022, emerging markets (EM) are again attracting investors' attention. If global interest rates stabilize, COVID-19 restrictions are relaxed in China, and the risk of nuclear war is minimized, UBS predicts that EM stocks and fixed-income indexes could earn returns of between 8-15% on a total returns basis in 2023. Morgan Stanley, for its part, expects a nearly 17% return on EM local currency debt. Credit Suisse favors hard currency debt, while DoubleLine's Jeffrey Gundlach has EM stocks as his top pick. The optimism surrounding EM markets is supported by past performance following market downturns; for example, the MSCI EM equity index soared 64% in 1999 following the Asian financial crisis and 75% in 2009 after the global financial crisis.

Bond Market Recovery in Sight

After a difficult year for bond investors, many are anticipating a turnaround shortly. Inflation, which can erode returns and drive up rates, is expected to moderate in 2023 as recessions take hold. Economists polled by Reuters predict that headline US inflation will decelerate to 3.1% by the end of the year. At the same time, Valentine Ainouz, fixed income strategist at the Amundi Institute, forecasts that the 10-year US Treasury yield will end 2023 at 3.5%, down from its current level of around 3.88%. Some strategists, including Joost van Leenders of Van Lanschot Kempen, have already bought into Treasuries on the expectation that inflation will decline as economic growth slows. However, van Leenders cautions against investing in eurozone bonds due to the ongoing uncertainty surrounding Brexit and the fiscal situation in Italy.

Commodities on the Rise

Commodity prices are expected to rise in 2023 as demand increases and supply chains continue to be disrupted by COVID-19. Oil prices, in particular, are predicted to recover as vaccine rollouts boost economic activity and travel. In addition, the growing to be disrupted by the pandemic. Copper, a key indicator of global economic health, is also expected to rise as demand for electric vehicles and infrastructure projects increases. Gold, meanwhile, is expected to see more modest gains as investors turn to it as a haven asset. However, some analysts caution that the success of these trades will depend on the ability of companies to ramp up production to meet the expected increase in demand.

Shorting the Dollar and Going Long on Bitcoin

Some fund managers are considering taking positions that bet against the dollar and in favor of Bitcoin. The value of the US currency is expected to decline due to rising inflation and a shift in Fed policy. Bitcoin could benefit from increased interest from institutional investors and a potential cash use decline due to the ongoing pandemic. However, these trades carry a high level of risk due to the volatile nature of both the dollar and Bitcoin.

Risks and Uncertainties to Consider

While these trades offer the potential for significant gains, it is important to note that many risks and uncertainties could impact their success. Inflation, for example, could continue to rise at a faster rate than expected, leading to further declines in the dollar's value. Various factors, including global economic recovery, trade tensions, and political instability, could also impact the success of emerging markets. The performance of commodities could be affected by supply chain disruptions, changes in demand, and the ability of companies to ramp up production. In addition, the ongoing COVID-19 pandemic and the rollout of vaccines could have unexpected consequences for global markets. As with any investment, it is important to consider these risks before making any trades.