Expect Sideways in 2023 and Another “Untouchable” Investment

On a recent webinar, Why 2023 Is the Year to Think Differently About the Market, CEO Jan van Eck and Portfolio Manager Eric Fine discuss why we expect 2023 to be a “sideways” year for equities and the promising outlook for emerging markets bonds.

What to Expect in 2023: The “Risk On” Rip That Never Comes

For most of the past decade, whenever there was a blip of volatility or uncertainty, markets expected that Federal Reserve (Fed) actions would keep the economy—and by extension, equities—on track. As we head into 2023, consensus thinking seems to be that we are just one piece of good news away from a Fed pivot. We don’t see it happening. Anyone who is expecting a “rip” on the back of a Fed policy announcement should take a closer look at current economic and monetary policy conditions. Labor markets remain strong and that won’t change overnight. Commodity prices and the Consumer Price Index (CPI) receive a lot of focus, but we think what the Fed is really fighting is wage inflation, which is endemic and hard to manage once it takes hold because it creates a spiraling effect. The Fed is currently in a staring contest with labor markets and after a year of tightening, labor markets aren’t blinking. This dynamic suggests higher interest rates for longer (2:20).

Services Inflation Is Not Under Control

U.S. Core CPI – Goods and Services (YoY% Change)

Source: Bureau of Labor Statistics. Data as of October 2022. The "Consumer Price Index for All Urban Consumers: All Items Less Food & Energy" is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. This measurement, known as "Core CPI," is widely used by economists because food and energy have very volatile prices.

If You Like Equities Over Bonds…Why?

These conditions are going to be sticking around for a while, and what the markets are looking at now is the pressure on corporate profitability. Stocks are more attractive if companies are more profitable. For those investors who are bullish on equities heading into 2023, our simple question is: why? 2023 corporate earnings projections are expected to decline next year (8:42).

Emerging Market Debt Poised for a Comeback?

So where to invest instead? In our view, there are not many super–cheap valuations at the moment. Monetary and fiscal policy, as well as global growth are all contractionary. However, opportunities we would emphasize in the current environment are fixed income—based on guidance from the 1970s—and commodity equities, which are very attractively priced and poised for growth.

As it relates to fixed income, we believe emerging markets are particularly interesting. Emerging markets bonds historically do well in rising rate environments—particularly when rates rise due to higher growth prospects rather than a taper tantrum. In addition, compared to the U.S. and other developed markets bonds, emerging markets bonds not only provide significantly higher nominal and real yields on average but also shorter durations.

EM Local Pays High Real Rates; DM Does Not

Real Policy Rates (Trailing) in EM and DM, %

Source: VanEck Research; Bloomberg LP. Data as of November 2022. Past performance is not indicative of future results.

Notwithstanding China’s more recent policy direction, emerging markets in general have moved much more quickly to increase interest rates compared to the U.S. and other developed market rates in order to stay ahead of inflation (14:10). The result has been not only higher nominal yields, but higher real yields. The benefits to emerging markets local currency investors are a more substantial level of income that is not eroded by loss of purchasing power (through a potentially weaker currency) and the potential for rate cuts to stimulate growth, if needed.

Other highlights from the webinar include:

1:10 – What we got right in 2022.
6:55 – Falling real wages: Shouldn’t people be working more?
8:01 – The market expects a Fed pivot (spoiler alert: interest rate futures are never right).
9:45 – What the 2023 market trajectory may look like.

The full webinar replay can be accessed here: Why 2023 Is the Year to Think Differently About the Market.

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