CIO Insights Resilience versus recession Letter to Resilience versus recession Investors Policymakers, at least in the U.S. and Europe, now appear resigned to weaker economic growth in 2023. Any recessions are likely to be short- lived, but they will not be painless. The combination of lower growth, lingering inflation and public spending constraints will be difficult for both Christian Nolting people and governments. Social inequality will be a topic of immediate and Global CIO growing importance. Slower economic growth in 2023 will not necessarily translate into weaker financial markets, however. In fact, markets could prove more resilient in the coming year than they have been in 2022. Market volatility in 2022 has been exacerbated by external events and changing expectations around the likely size and speed of monetary policy tightening, in the face of high and persistent inflation. Central banks have struggled to give consistent forward guidance. Confusion in markets has driven sharp swings in bond yields, also destabilising equity markets. Central banks and investors are likely to find 2023 rather easier. We forecast that inflation will ease down (but stay well above central bank target levels). We hope that major global setbacks (from geopolitics, disease or other factors) can be avoided. As a result, although more central bank rate hikes are in prospect, increases in longer-term government bond yields should be relatively modest from here on. The worst should now be over. For bond investors, yield and quality will no longer be a contradiction. More stable bond markets should, in turn, help lower equity market volatility. 2023 is likely to be an acceptable year for equities, but not a great one. Positive returns will be driven by some modest price/earnings expansion and dividends – but earnings per share will be stagnant. In this calmer environment, relative regional valuations may become more important. 2023 could also see a more stable USD with the Fed’s likely future hiking programme probably now sufficiently priced in. In fact, the EUR could strengthen slightly over the course of the year, given our expectation that inflation will come down more slowly in the Eurozone than in the U.S. Of course, next year will not just be about inflation and monetary policy tightening. China, for example, will be following a rather different policy path. We think that continued domestic stimulus will eventually succeed in turning its economy around. Chinese recovery, combined with regional reopening, means that Asia could have a good 2023. An overarching concern, with major investment implications, will be the environment. Limiting global temperature rises to 1.5 Celsius will involve major structural changes to the way we live. Investors should anticipate these changes and can, via ESG investment, help facilitate some of them. We highlight two of our long-term investment themes in this annual outlook: the energy transition (to greener sources of power) and infrastructure. These, and our other seven long-term investment themes (also discussed), are likely to provide major investment opportunities in the years ahead. In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Performance refers to a nominal value based on price gains/losses and does not take into account inflation. Inflation will have a negative impact on the purchasing power of this nominal monetary value. Depending on the current level of inflation, this may lead to a real loss in value, even if the nominal performance of the investment is positive. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. This document was produced in December 2022. 2