3 potential winners in 2023

The outlook for the new year is dominated by this one fear: recession.

Major economies such as the UK and Eurozone are believed to be already going through an economic contraction. The US – the world’s largest economy - expected to experience a downturn later this year.

Yet amidst all these recession fears at the onset of 2023, the financial markets still do present opportunities for investors and traders.

Here are 3 assets that may see a stellar year:

1) Gold to hit $2000?

Gold has long been seen as a safe haven asset: a way for investors to protect their money in times of heightened fear and uncertainty.

As proof, here’s a list of how gold performed during the US recessions (as listed by the NBER) that have occurred since 1990:

• Gulf War Recession (July 1990 – March 1991) = gold soared by as much as 17.5% at its peak on 21 August 1990.
   
• Dot Com Recession (March 2001 – Nov 2001) = gold up by as much as 10.4% at its peak on 26 Septembe 2001.
   
• The Great Recession (Dec 2007 – June 2009) = gold rose by as much as 28% by March 2008 when it traded over $1000 per ounce for the first time ever in the US futures market.
   
• Covid-19 Recession (Feb 2020 – April 2020) = gold hit a record high at $2075.47 in August 2020

Using such past performances as a guide, the prospects of gold’s prospects of climbing by another 9% from today’s prices ($1848 at the time of writing) to reach $2000 doesn’t seem too farfetched.

Fundamental perspective: What needs to happen?

Besides a US recession, the key component for gold’s ability to climb higher rests on this key factor:

• The US dollar has to weaken further as markets brace for the Fed eventually cutting interest rates to help support the US economy.

As bullion’s “enemy” becomes less potent in the face of a looming recession, that could encourage gold bulls to push the precious metal even higher in 2023.

At the time of writing, markets are predicting a 71% chance that we could see $2000 gold once more in 2023.

What could go wrong?

• If gold’s enemy #1 from 2022 makes a return: US inflation remains stubbornly higher, forcing the Fed to continue hiking interest rates aggressively, which in turn restores demand for the US dollar.
  
  That may force a major rethink among gold bulls, perhaps accompanied by the unwinding of some of bullion’s gains of late.

2) Japanese Yen: USDJPY back down to 125?

Last year, the Yen fell by 12.2% against the US dollar, making JPY the second-worst performing G10 currency against the greenback in 2022.

That’s all about to change, with the Yen ready to catch up.

Fundamental perspective: What needs to happen?

It all depends on what the central banks in the US and Japan do in relation to one another.

• Fed pivot: If the Federal Reserve “pivots” and is forced to lower US interest rates later in 2023 in order to offset a US recession, that should spell more weakness for the dollar.
   
• BoJ pivot: If the Bank of Japan also does its own “pivot” but instead of cutting, it actually raises its own interest rates, that should spell more gains for JPY.

Such expectations will come into sharper focus once the new central bank governor takes over when current BoJ Governor Haruhiko Kuroda’s term expires in April.
 

Keep in mind that the BoJ’s policy balance rate now still rests at negative 0.10%, making it a clear laggard across major central bankers that had been busy hiking their own rates throughout 2022.

In short, if the BoJ hikes rates at a time when the Fed is cutting its own rates (or perhaps even just thinking about making such a move), that should help pave the way for the Yen’s speedy recovery.

For now, markets predict a 53% that USDJPY would eventually trade below 125 sometime over the next 12 months.

What could go wrong?

• Still-dovish BoJ: the incoming BoJ Governor keeps Japan’s benchmark rate mired in negative territory on signs that inflation is not as sticky as hoped.

This scenario would be made worse if the Fed stays hawkish and keeps sending US interest rates much higher than the currently forecasted peak of around 5%.

A still-dovish BoJ + a still-hawkish Fed = USDJPY’s downside severely capped.

3) FTSE China A50 Index back above 14,000?

There is much hope surrounding the reopening of the Chinese economy this year, with the government essentially having abandoned its Covid Zero campaign.

And such optimism has already been playing out in Chinese stocks in recent months.

Here’s a comparison between the FTSE China A50 Index against its global peers since end-October through the present day:

• FTSE China A50 Index: +15.9%
   
• Europe’s STOXX 50: +7.3%
   
• MSCI ACWI Index (stocks across developed and emerging markets): +3.26%
   
• S&P 500: -1.24%

Fundamental perspective: What needs to happen?

• The world’s second largest economy needs to finally break off the Covid shackles that have hampered it over the past 3 years.

Once the economy can overcome the recent snags of skyrocketing Covid cases and hospitalizations, consumers need to eventually feel confident once more about going out their economic activities, be it returning to the office, spending money at physical stores, and even going on vacations.

Assuming that China can find a steady footing and follow in the rest-of-the-world’s footsteps in terms of the post-pandemic recovery, that promises to help restore the earnings of China’s public-listed companies, which in turn should entice more investors into pushing these stock prices higher.

• Additionally, policymakers on both the fiscal (government) and monetary (central bank) sides must continue adopting a supportive stance to shore up China’s economic momentum.

All of the above should position China as an attractive investment destination for foreign investors, especially within the context of a looming global recession.

What could go wrong?

• If China continues to struggle with the Covid menace, that would only worsen the expected global recession and deal a massive blow to hopes for a sustained recovery in Chinese stock markets.
   
• Also, if China’s inflation starts to run too hot a la the rest of the world, that may force policymakers into a restrictive stance to curb inflation at the expense of economic growth.
   
• If 2023 also sees a return of heightened geopolitical tensions between the West and China, that could also sour sentiment surrounding Chinese assets.