Investors should look to ‘good quality corporate debt and gold’ in 2023, strategist says

LONDON — As fundamentals maintain up and tight monetary circumstances weigh on inventory markets, corporate debt and gold may very well be sturdy funding choices in 2023, in accordance to Michael Howell, managing director at CrossBorder Capital.

A slowing economic system, tightening monetary circumstances and rising yields may sometimes immediate better stress in the corporate debt markets and the next charge of delinquencies. But companies have thus far managed to refinance with comparative ease by the present cycle.

Howell acknowledged that issues might get barely tougher for some areas of the market, however mentioned that many companies, significantly excessive development firms, are in “pretty decent shape.”

“Balance sheets are good, so far revenues seem to be holding up, and they [companies] can access borrowing from the banks,” Howell mentioned Wednesday on CNBC’s “Squawk Box Europe.”

“If you go back to 2008, remember the banks’ financing tap turned off very quickly, and that was where there was a real problem. So, this time, corporate debt markets are actually in a reasonably good shape, so that is an area that I would suggest is not a bad area for 2023.”

Market contributors have in latest months been looking out for a “pivot” from the U.S. Federal Reserve and different main central banks, after a 12 months of aggressive rate of interest hikes to fight sky-high inflation.

Howell mentioned a possible such pivot in 2023 would probably affect markets. He steered central banks will transfer to present better liquidity to markets and defend towards the draw back threat of a weakening economic system earlier than they may surrender their hawkish stance on rates of interest. He drew a comparability with the U.S. financial recession of March-November 2001, when the Fed started chopping charges early in the 12 months.

“The economy didn’t turn until the end of 2001…the corporate debt market picked up prior to that, around about Q2, Q3 [second, third quarter] of 2001. Equity markets, I’d say it was much more of a 2002 event. The government bond markets did pretty much nothing through the year, they probably delivered maybe a decent mid-single figure return,” Howell defined.

“Where you want to be positioned next year is good quality corporate debt and gold.”

At face worth, expectations of further liquidity from central banks in 2023 appear at odds with the hawkish signals sent in recent weeks by the Fed and the European Central Bank. This messaging shocked markets and added stress on shares and different threat property.

Howell argued that, whereas the ECB often is the final to achieve this, the Fed and the People’s Bank of China (PBoC) have already begun introducing liquidity.

“The PBoC is already putting in more liquidity than they have done in 18 months — this is a clear turnaround. China needs to boost the economy and the People’s Bank is the way to do that,” he mentioned.

“The Federal Reserve is adding liquidity. You’ve got oil prices which are below $80 a barrel — that will release liquidity into the system. The dollar is down almost 10% from its peak — that will boost the FX swap market, which is a key area of shadow banking. So all these things are beginning to pick up.”

Howell harassed that the market is at the moment at “maximum tightness” and that its liquidity place can solely enhance in 2023 — however that this doesn’t imply a “green light for equities just yet.”