Stagflation Will Rule 2023, Keeping Stocks in Peril

(Bloomberg) — Stagflation is the key risk for the global economy in 2023, according to investors who said hopes of a rally in markets are premature following this year’s brutal selloff.

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Almost half of the 388 respondents to the latest MLIV Pulse survey said a scenario where growth continues to slow while inflation remains elevated will dominate globally next year. The second most likely outcome is deflationary recession, while an economic recovery with high inflation is seen as least probable.

The results signal another challenging year for risk assets after central bank tightening, surging inflation and impact of Russia’s invasion of Ukraine have fueled the worst equity rout since the global financial crisis. Against this grim backdrop and as stocks have rallied in the fourth quarter, over 60% of survey participants said investors around the world are still too bullish on asset prices.

“Next year is still going to be difficult,” said Nicole Kornitzer, the Paris-based portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc., which oversees about $6 billion. “Definitely, stagflation is the outlook for now.”

Meanwhile, about 60% of participants expect the dollar to weaken further a month from now. That contrasts with last month, when almost half of the respondents said they would go into the November Federal Reserve meeting with a long position in the dollar. The strength of the greenback has weighed on several asset classes this year, including other currencies like the euro and emerging-market equities. A sliding dollar could create pockets of opportunities in what’s already expected to be a lackluster 2023.

“The dollar will probably weaken throughout 2023,” Kornitzer said. “Maybe not dramatically, but the trend will probably be downward.” A recession in the US and the direction of rates will be the key catalysts for the currency, she said.

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All eyes are on the Fed moving into 2023 with growth likely to be hampered further as rates remain higher for longer, a regime which…

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