Main asset classes Equities 38 | 39 Regional outlook Eastern Europe, Middle USA UK Asia East and Africa Solid earnings picture, but relatively elevated valuation Favorable valuation, lackluster growth Recovery remains elusive US equities saw a sharp de-rating in 2022 as the Fed The UK outperformed global equities in 2022 (in local Asian equities (excluding Japan) have been under pressure in Clear bright spot within the region increased its policy rate significantly. In particular, the currency terms), driven by stronger earnings growth thanks to 2022 as China’s zero COVID-19 policy, slowing global growth We expect Eastern Europe, Middle East and Africa (EEMEA) technology sector, which the USA has substantial exposure to, the market’s sector composition (higher energy and defensive and USD strength weighed on regional earnings. We believe markets to perform in line with the benchmark MSCI came under strong pressure in 2022. However, while the US exposure). UK equities also benefited significantly from the 2023 is likely to be another challenging year for the region, Emerging Markets Index in 2023, with a preference for equity market offers a relatively stable earnings picture, it still GBP’s depreciation in 2022, given that UK equities earn as tightening monetary conditions are expected to slow Asian Middle East/Gulf Cooperation Council (GCC) markets within trades at a premium to the rest of the world. Growth is most of their revenue from international markets. Looking economies, leading to meager earnings growth. Though the region. EEMEA as a region has undergone significant expected to slow, but the economic outlook is still better than forward, the UK is still trading at a meaningfully attractive valuations are at reasonable levels and foreign positioning upheaval in 2022 given the geopolitical shocks and soaring for Europe as the USA is less dependent on energy imports. valuation level and has one of the highest dividend yields remains light, the region lacks a catalyst for a strong recovery. energy prices, leading to varied performance across the We believe that 2023 will be a year of two very different within developed markets. However, a lot of these advantag- We expect the Chinese economy to remain weak, despite regional markets. Eastern European markets, for example, halves for US equities. As long as the Fed keeps its restrictive es are offset by negative earnings growth forecasts for the easing monetary and fiscal conditions, until there is flexibility suffered from the Ukraine war and related energy disruptions, stance and yields remain elevated, US equities will show a next two years. We currently see no catalyst for valuations on the zero COVID-19 policy. Conversely, South Asian which we expect will remain an overhang in 2023. South rather muted performance. Once markets start pricing in a given a pending trade deal with the European Union and markets should benefit from the post-COVID recovery. Africa is expected to deliver returns in line with the benchmark less hawkish Fed, we believe US equities have scope to geopolitical uncertainties. However, on a relative basis, they trade at a significant as the earnings outlook weakened on lower metal prices amid recover. premium, suggesting a large part of the recovery is already global growth concerns. Middle East/GCC markets have priced in. As such, we expect regional equities to perform in displayed impressive resilience and are on track to generate Switzerland line with global peers. Within Asia, we prefer stocks linked to the strongest returns of any region globally for the second Eurozone China’s sustainability drive, as the sector enjoys strong state consecutive year. These returns have been driven by three support and is delivering robust earnings growth. key factors: elevated oil prices, which are expected to Defensive characteristics attractive amid uncertainty generate a cumulative current account surplus in excess of Geopolitical and growth risks cloud the outlook The Swiss equity market is geared toward so-called defensive USD 1 trn over the next three years; robust delivery on Going into 2023, we are cautious on Eurozone equities and sectors, as healthcare and consumer staples account for Latin America economic transformation plans that have allowed the region’s expect regional markets to remain under pressure amid more than 60% of the benchmark index. Hence, Swiss non-oil sector to flourish, especially in Saudi Arabia and the ongoing macro headwinds for the region. Our economists equities tend to outperform when purchasing managers’ UAE; and a steady pipeline of initial public offerings and expect the Eurozone to already be in a recession going into indices decline and vice versa. Swiss equities thus are likely Geographical isolation as a positive loosening of restrictions on foreign ownership limits that have 2023, and geopolitical risks further complicate the outlook for to outperform in a volatile environment with slowing growth, in After a strong performance in 2022, we expect Latin helped increase the GCC’s weight in the MSCI EM bench- the region. Earnings growth for the region is expected to lag our view. In addition, the earnings outlook for Swiss equities American equities to deliver attractive returns in 2023. The mark from 1.4% in 2018 to around 8% at the beginning of the broader MSCI World Index amid a sharp deterioration in is relatively bright, with double-digit earnings growth region should benefit from supply chain reshoring, which Q4 2022. We expect these factors to remain in place over the outlook for consumers and businesses. Any potential expectations for 2023. While a stronger CHF is a risk for the could provide a boost to the economy. Financials (25% of the 2023, albeit with less intensity compared to the preceding peace agreement regarding Ukraine would be a positive export-oriented Swiss market, Swiss companies tend to be MSCI Emerging Markets Latin America Index) should remain two years. Finally, institutional EM investors have low development for the region. quick to adapt to a stronger CHF. well supported by high policy rates. Central banks began exposure to the region, and this should keep foreign inflows hiking rates earlier than their counterparts elsewhere, and we structurally “stickier” over the coming few years. Taking the expect rate cuts could come as early as Q2 2023, which above factors into account, we expect the GCC to remain the Japan could be a positive factor for the market. Valuations are bright spot and deliver significantly more defensive returns attractive and dividend yields remain appealing at around over 2023 than the broader EM universe. 7.8%. We note commodity price developments will likely have Currency is the key a major influence on returns. We expect some volatility as the Japan outperformed other equity markets in 2022 thanks in political transition in Brazil will likely usher in new fiscal rules large part to currency effects. While most central banks and regulations for certain sectors. However, global delivery tightened aggressively, the Bank of Japan stuck with its bottlenecks coupled with elevated average commodity prices dovish positioning, which weighed on the JPY. We believe create an environment from which Latin American equities currency dynamics will remain a dominant factor for Japanese should benefit relative to other EM, in our view. equities in 2023. Fundamentally, while Japanese equities remain cheap, Japan is a very cyclical market and may suffer from the ongoing economic slowdown.