Outlook 2023-2024 Global slowdown to subdue inflation 1 December 2022 From the Core Investment Macro Research team With contribution from: Chris Iggo – AXA IM Core Investments CIO Romain Cabasson – Solution Portfolio Managers, AXA IM Core Multi-Assets Alessandro Tentori – CIO AXA IM Italy

Table of contents Macro outlook– The clouds around the inflation peak 3 By Gilles Moec Investment Outlook – Positive but tempered return expectations 5 By Chris Iggo Summary – Recessions likely amidst global realignment 7 By David Page US – Mild recession to see inflation fall 9 By David Page Eurozone – Difficult roads ahead 11 By François Cabau and Hugo Le Damany UK – Navigating troubled waters 13 By Modupe Adegbembo Canada – Slower activity but avoiding recession 14 By David Page Japan – Recovery appears set to continue 15 By Modupe Adegbembo China – A bumpy path to reopening 16 By Aidan Yao Emerging Markets – Darkest before dawn 18 By Irina Topa-Serry Emerging Asia – A soft landing despite growing external headwinds 19 By Shirley Shen Latin America – Rude awakening 20 By Luis Lopez-Vivas Currencies – US dollar a fading star 21 By Romain Cabasson Cross assets – The year of the bond 22 By Gregory Venizelos Rates – Shadows and Lights 23 By Alessandro Tentori Credit – A film noir for optimists 25 By Gregory Venizelos Equity – Rebound prospects amid headwinds 27 By Emmanuel Makonga Forecast summary 29 Calendar of events 30 Abbreviation glossary 31 2

Macro outlook– The clouds around the inflation peak Gilles Moec when delivering 75bp hikes. True, the Euro area will likely only AXA Group Chief Economist hit the upper end of the “neutral range” (1 to 2%) for its policy and Head of AXA IM Core Investments Research rate in December 2022, but the starting point was lower than in the US, and we expect the neutral threshold to be exceeded in Q1 2023 (at 2.5%). Combined with a tightening in banks’ lending Key points standards, the ECB stance has in our view already taken broad financial conditions into restrictive territory. The ECB’s approach, while inflation in the Euro area remains driven by supply-side • 2022 ushered in a new monetary policy era. A developments (in particular gas prices) which can hardly be policy-induced recession looks like the price to pay affected by monetary policy, is explicitly focusing on anchoring to get inflation back under control after a peak in inflation expectations, but we suspect a significant share of their late 2022. new-found hawkishness is fuelled by the depreciation of the euro. • Higher interest rates will gradually impair the capacity of fiscal policy to remain accommodative. Indeed, the world economy – once again in a configuration In the US, “policy paralysis” is on the cards after the eerily resemblant to episodes from the 1990s – is adjusting to a mid-terms, while in Europe fiscal policy will still stronger dollar fuelled by the Fed’s policy. The ECB is actually deliver more stimulus in the first half of 2023 to one of the least affected central banks. Its counterparts in deal with the external inflation shock, but we think emerging markets have much more to do and we have seen this will be the “last gasp” of fiscal activism. cumulative hikes in excess of 1,000 basis points in some • Supportive fiscal and monetary policy have countries (Brazil, Hungary). We are not overly concerned by dissimulated the underlying slowdown in potential systemic risks in the emerging world – their intrinsic financial growth for two decades. A new growth model is position is much better than in the 1990s, a key difference with needed, but elusive. that period – but the extreme tightness of monetary policy will seriously dampen domestic demand, especially when fiscal The immediate cost of future disinflation policy will have to adjust to the rise in sovereign refinancing costs (Brazil again). Those who have chosen not to defend their The inflation shock has defined 2022. Not primarily because as currency and bucked the trend by cutting rates are facing usual, by eroding purchasing power and corporate margins it painful hyper-inflation, such as Turkey. has hampered consumption and investment – private spending has been remarkably resilient actually in the developed world China is the one big exception to this rule. Even if the exchange given the circumstances – but because it has marked the end of rate has been softening as a result, Beijing has been able to an era for monetary policy. loosen monetary policy against a backdrop of muted inflation. Yet, the Chinese authorities continue to be reluctant to make Having missed the signs that what was initially widely seen as a full use of their still wide policy space for fear of rekindling transitory price reset after the post-pandemic reopening was financial stability risks, while the shift away from the “zero turning into persistent inflation, the key central banks engaged Covid” policy is tentative at best, which is likely to trigger more in swift tightening without equivalent since the 1990s. The pandemic-related disruptions in 2023. China’s contribution to catch-up took the Federal Reserve (Fed) from what was still a world growth will remain subdued in our view. very accommodative stance to properly restrictive territory in about half a year. Combined with Quantitative Tightening, this We are thus in a configuration we have not seen for decades: a has produced the steepest tightening in broad financial policy-engineered slowdown in the world economy. The conditions since the Great Financial Crisis of 2008-2009. intensity and duration of this tightening phase depends of course on the speed of disinflation at the epicentre of the In principle, not all central banks should have followed the Fed. problem: the US economy. In the autumn of 2022, some The US had a clear case of overheating to address, after the tentative signs were finally appearing that the labour market is excessive fiscal stimulus of the late Trump and early Biden softening, which would herald the deceleration in wages into administrations, with an extremely tight labour market plagued 2023 which the Fed wants to see. The “inflation peak” has by a lower participation rate. The Euro area had been more probably been hit, which should allow a less rapid pace of rate prudent with its fiscal stance during the pandemic and hikes, but the distance from target, and the risks of further participation is rising there, now exceeding the US level in the slippage are so high that the “terminal rate” has not been 15- to 64-year-old bracket. Yet, the European Central Bank reached (we think it will hit 5%). This means that, given (ECB) has sometimes mirrored the Fed approach – for instance transmission lags, the monetary stance throughout 2023 is 3

likely to remain more restrictive than in the second half of risks of the region settling on a wage/price loop which would 2022. This is predicated on our belief that the Fed won’t want force the ECB into even more tightening. A conflict is however to cut rates as quickly as the market is currently pricing (second likely to emerge towards the second half of 2023 as significant half of 2023) since they will want to be satisfied that they have government issuance would clash with the ECB’s likely decision properly broken the back of inflation. The price to pay for this to gradually reduce the reinvestment of the bonds it purchased will be a recession in the first three quarters of 2023 in the US during Quantitative Easing. Even if the European fiscal which will trigger the usual adverse ripple effects over the surveillance system were to allow for another prolongation of entirety of the world economy next year. the exemption from the deficit reduction rules, we expect the budget bills for 2024, which will start to be discussed in the Memories of past mistakes often inform policy-makers action. summer of 2023, will mark the end of fiscal profligacy. Just like the premature monetary tightening of the 1930s was the mistake Ben Bernanke wanted to avoid at all costs in his Looking for a growth model management of the aftermath of the Great Financial Crisis of 2008/2009, this time it’s the 1974 error which is probably Over the last two decades, monetary and fiscal support has haunting Jay Powell. Indeed, contrary to popular belief, the Fed often dissimulated the underlying lack of dynamism of the initially responded to the first oil shock of 1973 by rapidly hiking developed economies, faced with slowdown in productivity rates. Its fateful decision came at the end of 1974 when, adding to the demographic woes. In some countries, and that’s worried by the significant rise in unemployment, the Fed certainly the case in the US, the decline in labour market reversed course although inflation was still in double-digit participation is another source of weakness for potential GDP territory. This laid the ground for rampant inflation throughout growth. Now that policy support is past its peak, those the second half of the 1970s, ultimately forcing the Fed into a structural flaws will take centre stage. massive tightening in 1980. The recent experience in the UK is interesting from this point of In a way, what lies ahead of us is the mirror image of monetary view. While the content of the plan was deeply flawed – policy “over-activism” of the last two decades. Central banks upfront, unfunded tax cuts combined with vague promises had come to the conclusion that it was only by driving the about structural reforms – at least Liz Truss’ administration economy “red hot” – well above potential – that they would tried to address the deterioration in potential growth in the UK. manage to bring inflation back to target from their stubborn, The U-turn on the fiscal stance by the Sunak administration is near zero new trend. Today, the conclusion they have reached of course welcome from a financial stability point of view, but is that it’s only by driving demand below an already low supply what is missing is a plan to re-start the economy. pace that they will be able to bring inflation back to 2%. No pain, no gain. On the list of macro challenges, we need to add the likely “greenflation” looming – the necessary fight against climate Fiscal activism’s last gasp change is forcing the adoption of cleaner, but usually more expensive technologies, while we expect more regions beyond While the monetary tightening is synchronized across the the EU to adopt forms of carbon pricing. “De-globalization” is Atlantic, the fiscal stance has started to diverge. In the US, the also a risk, especially for countries which have made the choice Inflation Reduction Act – which in reality is a Green Transition of extroverted growth – such as Germany. The US is probably in Act – will probably be the last big program of Biden’s mandate a more comfortable position than Europe. Its demographic as the Republican’s midterm gain of the House majority will position, although deteriorating, is less problematic, and the probably usher in at least two years of policy paralysis. But this country can at least count on cheap, domestically produced is probably “what the doctor orders” at the moment in the US: energy. The European Union at the time of the pandemic had there is little point in fiscal policy attempting to offset the Fed managed to give substance to its long-term growth strategy by stance given the need to address the economy’s domestically- breaking the taboo of debt mutualisation to fund the “Next focused overheating. The situation is very different in the Euro Generation” programs. We find it concerning that the member area where governments have engaged in a new series of fiscal states have not found the same capacity to respond to the fallout stimulus to mitigate the impact of elevated energy prices on of the Ukraine war with another concerted investment effort. households’ income and corporate margins in the context of the Ukraine war. While we are confident that by the middle of 2023 the world economy will start improving again, we would warn against any There is still probably some degree of complementarity excessive enthusiasm. Beyond the cyclical recovery, many between fiscal and monetary policy in Europe. Households structural questions will remain unanswered. receiving temporary income support from governments may reduce pressure on more persistent wages, thus limiting the 4

Investment Outlook – Positive but tempered return expectations Chris Iggo liabilities is key. It seems in the early part of 2023, with Chair of the AXA IM Investment Institute macroeconomic uncertainty still running relatively high, and CIO of AXA IM Core investors are likely to retain a level of defensiveness. Volatility and ongoing periods of losses should not be ruled out. Key points Improved trade-off • Peak interest rates support fixed income Fixed income investors, however, stand to benefit most from • Capital gains hard to come by the peak in inflation and policy rates. For bond markets, the • Bonds provide improved income returns trade-off between return and risk has improved. Yields are • Equities at risk from recession higher – compared to the situation in recent years – and this • Earnings forecasts are likely to be cut further provides more ‘carry’ for bond holders and better income • Some scope for sector rotation opportunities for new fixed income investments. At the same • Much depends on energy prices. time, with higher yields, fixed income has the potential to play a more significant role in multi-asset portfolios. In 2022, very unusually, both bond and equity returns were very negative. Contrasting returns Thankfully, central banks don’t raise rates by 300-500 basis points every year. As such, we don’t expect a repeat in 2023. If equities struggle with the growth environment, bonds can There were few places to hide in 2022. Inflation, monetary provide a hedge and an alternative to those investors putting a policy tightening and geopolitical risks marked a stark contrast premium on income. to the drivers of returns in 2020 and 2021; the backdrop ultimately forced a revaluation of fixed income and equity Supporting duration assets. From low to high inflation, and from low to high interest rates, returns suffered as markets adjusted to the new Higher rates dominated 2022 and their impact on valuations paradigm. has been clear. When and if growth slows, central banks will stop raising rates, as long as inflation is easing back. This is However, as 2022 came to a close, markets found a more already priced in to yield curves with markets anticipating peak stable footing. Fourth quarter (Q4) returns were significantly rates in the US in Q2 and in the Eurozone in Q3. For now, it is better than what had gone before, even if the outlook was an environment that supports exposure to the shorter maturity clouded – as it still is. Inflation is high and is only just showing part of bond markets. Such strategies currently provide the signs of moderating. Central banks are not likely to stop raising highest yields seen for years. Extending duration along the rates until well into the new year. More importantly, we expect curve also locks in better yield and provides optionality to recession on both sides of the Atlantic. recognise capital gains once markets start to anticipate central banks easing. Our base case is that this is unlikely until late The modest recovery in asset prices towards the end of 2022 2023 or 2024, but markets tend to look forward to these should not, in our view, be seen as a step towards revisiting the events. valuation peaks of recent years. Equity price-earnings ratios are likely to remain below their highs and bond yields are not going Income vs. total returns back to close to zero. The kind of capital returns that investors enjoyed in the quantitative easing era are unlikely to be The new regime for fixed income markets and related repeated any time soon. The current environment requires strategies is a more balanced one. In recent years, returns were more thoughtful investment strategies than just chasing dominated by capital gains as central banks pushed down earnings growth and higher yield, irrespective of valuations or yields. Income should now be a more significant contributor to credit risk. total returns (Exhibit 1). This has portfolio construction implications with bonds now more suited to income-focused The inflation advantage strategies as well as allowing institutional investors more flexibility in meeting liabilities without taking unnecessary In a recession, cash flow from corporate assets to investors credit or liquidity risks to achieve yield targets. becomes challenged. Earnings growth slows as costs rise and revenues come under pressure. In credit markets, scarcer cash This focus on income, with more modest capital gain potential, flows mean understanding how borrowers manage their debt supports corporate bond markets. However, borrowers will be 5

challenged and this could impact on the level of credit spreads. market would be welcome developments for emerging market Rates have done a lot of the work in pushing up corporate debt. borrowing costs. Spreads have also widened but remain below the highs seen in previous periods of stress. This means that for The Q4 equity market rally was chiefly driven by expectations similar credit ratings, today’s yields are significantly higher than of peak inflation and rates but it needs to be judged against a in recent years. This provides attractive return potential as deteriorating earnings outlook and in an environment where corporates have generally managed balance sheets well, interest rates are going to be higher than they have been for terming out debt, containing leverage levels and ensuring years. These will remain headwinds for stocks for some time. healthy interest coverage. Over the medium term, today’s Even after the significant de-rating already seen, stock markets spreads will allow investors to benefit from capital gains when are still vulnerable to the expected earnings recession. corporate fundamentals do improve. A balanced outlook Exhibit 1: Income to dominate bond returns Global Bond Market Index - Returns and Yield There is the potential for some sector and style rotation going 6.0 Price Return Income Return Yield forward. Energy stocks have outperformed on the back of high oil and gas prices. Historically, however, energy sector earnings 4.0 are more cyclical and with lower long-term growth potential 2.0 than the more dynamic new economy sectors which have been most impacted by the market de-rating. 0.0 The long-term outlook for traditional energy companies is -2.0 challenged by the momentum of the energy transition. Sure, prices may remain high but this is not guaranteed if growth -4.0 undercuts energy demand or if there are new developments on 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 the supply side (an end to the war in Ukraine; a return of Iran Source: Bloomberg LLP - ICE BofA Bond Indices and AXA IM Research, 17 November 2022 to global oil markets). At the same time, a new corporate investment cycle will eventually benefit technology and High time for high yield? automation while government policies are more focused on energy efficiency and healthcare. Core credit investment strategies can achieve higher yields with less credit risk. Subsequently investors need not chase returns It is not unheard of to have consecutive years of negative in more economically-sensitive sectors when more defensive equity returns. However, I believe the outlook is more credit sectors offer attractive yields. However, we also see a balanced; earnings are under pressure but valuations more role for high yield credit. Yields have been at levels in 2022 that attractive. Outside of the US, markets have seen significant historically have been associated with subsequent positive declines in price-earnings multiples. European markets, for returns. High yield markets are of better credit quality in example, would be well placed to rally should there be positive general than in the past and have seen similar improvements in developments in Ukraine. Asia will benefit from a post-‘Zero- credit metrics as the investment grade market. Of course, COVID’ recovery in China. Long term, however, the US defaults will rise a little but we have little concern about a large valuation premium is not likely to be challenged given the wave of refinancing-related defaults. Given the close dominance of US technology, a greater level of energy security relationship between the excess returns of high yield bonds and more positive demographics. In the near term though, (relative to government bonds) and equity returns, we see high some highly-priced parts of the US market remain vulnerable. yield as a relatively lower risk option on an eventual recovery in equity returns. Global tightening forced a revaluation across asset classes. Cash flow expectations have been challenged and investors should Chasing income be less confident about capital growth strategies as we enter 2023. Bond returns should improve relative to volatility and Higher yields can be achieved with less duration and credit risk parts of the equity market are becoming cheap. As 2023 than in recent years. That is useful in this kind of economic unfolds, there should be more clarity on the macro outlook. environment. A significant improvement in risk-adjusted This should support positive, albeit prudent, portfolio return performance for more challenged parts of the fixed income expectations. market, like emerging market debt, may have to wait until the overall outlook and risk sentiment is significantly improved. An end to the Ukraine war and a recovery in the Chinese property 6

Summary – Recessions likely amidst global realignment David Page even escalate, either accidently or with Russia threatening the Head of Macro Research use of nuclear or chemical weapons. Macro Research – Core Investments Geopolitical risks are not restricted to Europe. Tensions between the US and China have worsened in recent years. Key points Recent talks between Presidents Joe Biden and Xi Jinping offer hopes of arresting a further deterioration. Taiwan remains a • We expect inflation to fall back towards target over key source of tension. The US has also imposed significant restrictions on the export of high-end technology to Chinese the coming two years as global growth slows, with companies perceived as colluding with the military. In practice, recessions forecast in both Europe and the US this casts the net widely and with the US pushing for third-party • The Ukraine war and wider geopolitical tensions are enforcement, this could materially restrict Chinese access to causing a realignment of energy and wider supply semiconductor technology. This risks impacting China’s chains tracking broad geopolitical contours potential growth and it could also have a broader impact on • Inflation looks set to fall but pressures on global trade. Yet combined with a post-pandemic realignment government finances have created social strains of global supply chains, including a mix of on-shoring, near- • Structural changes from an ageing workforce and shoring or friend-shoring, there is a marked uncertainty over post-pandemic effects add to the uncertainties the scale and impact of any deglobalisation. Exhibit 2: Russia invasion boosted inflation Previous shocks continue to pose threats Oil and wheat price USD/barrel USD/bushel Our outlook and expectation for 2023 and 2024 is to finally see 140 Russian invasion 14 inflation retreat towards central bank targets against a 120 Oil (WTI) [Lhs] 12 backdrop of soft global growth, with recessions in Europe and 100 Wheat (Soft Red no.2) [Rhs] 10 the US, alongside a lacklustre recovery in China, before a slow 80 8 recovery emerges in 2024. We recall that two of our last three Outlooks were rewritten within months of the new year. The 60 6 first after COVID-19, which had not even been identified as we 40 4 went to print; the second after Russia’s invasion of Ukraine, 20 2 which added further impetus to inflation from disrupted energy 0 0 and food markets (Exhibit 2). Chastened by both experiences, Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 we cautiously consider the risks around this year’s Outlook. Source: Datastream and AXA IM Research, 23 November 2022 The pandemic led to the wildest swings in GDP on record. The A global realignment of energy supply is already underway, most obvious present threat from COVID-19 is in China. China’s along the lines of broad geopolitical contours. Europe faces the initial success in containing the virus has been followed by slow end of cheap and plentiful natural gas supply, a constraint likely preparation towards living with it. It recently announced to drive it into sharp recession this winter. Without the swift measures to tackle this by accelerating vaccination rates and installation of additional liquefied natural gas (LNG) import increasing medical capacities. But it is doing so against a capacity, this will also impact next winter. LNG terminals are renewed outbreak, which still threatens interim restrictions. also being pushed to their limits, with US and European The trade-off between loosening restrictions and increased facilities run at materially higher load factors than before, with vulnerability will persist and likely weigh on Chinese activity associated risks e.g., the explosion at the US Freeport terminal. across 2023. However, COVID-19 remains a global risk as the Europe is also about to impose a ban on Russian oil, with the US threat of immunity evading mutations still exists – this is to implement a price cap. Both risk uncertain reactions. difficult to quantify risk, but we assume it is easing. The outlook for energy markets also depends on the weather. A The war in Ukraine continues but recent Ukrainian successes in mild start to the Northern Hemisphere winter should help the East and South highlight the unpredictable nature of the Europe. This is consistent with a La Niña weather system over conflict which some had thought Russia would quickly win. As the South-Eastern Pacific, which is entering its third year and Russia conscripts hundreds of thousands to the region, an end often sees milder European winters. This will, however, also does not appear in sight. Moreover, there are risks that it could drive torrid weather conditions elsewhere. Moreover, climate 7

change is driving trend temperatures higher but also increasing and the US in 2023 but not as sharply as previous downturns. In weather extremes. This will affect energy but will also have a part this reflects the particular tightness in the labour market profound impact on food production. and an expectation that falling vacancies, rather than job losses may do more to loosen the market. In part it reflects the Inflation, government pressures and elections withdrawal of labour supply as a result of both the pandemic and ageing. The combination has been a long-term headwind Inflation has been the most obvious consequence of additional to potential growth which we expect to persist into 2023. supply shocks. We expect inflation to ease from the start of 2023. Disinflation will vary from country to country, reflecting Exhibit 3: Labour supply reacts differently across regions different economic conditions and local norms in terms of Change in participation rates from pre-covid levels (Q3 2022) expectations and pass-through. Meanwhile, persistently high % levels of inflation are having material societal impacts. In 1.5 16-24 developed economies inflation is draining government 1.0 25-55 finances, requiring public belt tightening, which can lead to 0.5 55+ social unrest. For emerging markets (EM), food and energy 0.0 inflation have a more direct impact on overall price levels and -0.5 historic periods of EM social turbulence have occurred during times of high inflation. -1.0 -1.5 * UK data 25-50/50+ Governments face increasing strain over the coming years. EMs ** EU data up to 64, Q2 2022 are impacted by tight global financial conditions, particularly an -2.0 US UK* Eurozone** elevated dollar. Some ‘frontier’ economies have already fallen Source: BLS, ONS, OECD and AXA IM Research, 23 November 2022 into financial crisis, with several appealing to the IMF. This will likely continue in 2023. Larger EM economies face the same We expect recessions in Europe’s economies, driven by the risk, but we but do not see a systemic EM crisis evolving. Risks energy shock. We also forecast a mild recession in the US – are not confined to EMs. The UK saw its fiscal sustainability more a consequence of tighter financial conditions in response questioned in 2022 and requires severe austerity over several to excess inflation pressures. We expect China’s growth outlook years to restore fiscal rectitude. Many European states have a to remain relatively subdued, forecasting another contraction worse starting point and markets will monitor developments in Q1 GDP as COVID-19 restrictions make an impact again. We closely as the European Commission negotiates medium-term forecast global growth of 2.3% in 2023, compared to IMF debt strategies with these countries. forecasts of 2.7%, and only expect 2.8% in 2024. The electoral timetable does not suggest significant political Central banks quickly tightened policy as inflation rose in 2022, change over the coming years. We think Turkish elections in but this poses risks for 2023. Forward-acting monetary policy June 2023 could present further financial stability challenges. In tools employed using backward-looking data are a recipe for developed markets, after Northern Ireland Assembly Elections over-shooting. Some central banks appear to be shifting to a expected in 2023, the UK faces a General Election in 2024. more forward-looking approach, led by the Bank of England Current polls suggest a change of government, but with both (BoE), but with a noteworthy shift from the Federal Reserve. parties having recently moved towards the political centre, this The onset of recession in many economies should soon mark election promises to be the least economically damaging in the peak in interest rates although persistently resilient labour over a decade. US Presidential Elections will be held in markets are an upside risk. Across Europe, we forecast peaks at November 2024. Midterm elections further damaged former lower rates than markets expect. President Donald Trump’s standing, but he has still announced that he will stand for re-election. President Biden’s better We are also cautious that inflation may take longer to midterm performance would help his cause, but it is not moderate than markets consider, likely deferring future easing obvious that he will seek a second term. Uncertainty thus in the monetary stance to 2024 for most. In EM, Latin American surrounds both parties’ nominees for the 2024 elections. countries quicker to tighten could begin easing later in 2023, including Brazil, Peru and Chile. In developed markets, the BoE Forecasting uncertain amidst structural change may be among the first to ease, perhaps joined by the Bank of Canada if the housing market reverses more sharply than we Most importantly, these developments take place amid expect. Rate policy may also be affected by balance sheet ongoing structural changes, including shifting demographics – policy, all but relegated to background noise by many central ageing in key economies – and post-pandemic reorganisation banks, but we think it is likely to have more visible impact (Exhibit 3). We predict unemployment will rise across Europe across the course of 2023. 8

US – Mild recession to see inflation fall David Page means that if inventory grows at a slower pace, as it is now Head of Macro Research doing, it weighs on activity. Recessions are typically driven by Macro Research – Core Investments reversals in inventory. Second, downward revisions to the saving rate in the latest GDP release add to our view. These suggest households drew more heavily on savings to finance Key points spending in 2022. This illustrates the strain on real incomes and suggests household buffers against future pressure are smaller. • The US economy appears to be heading for recession – we expect it to contract in the first half of 2023. For now, unemployment remains a subdued 3.7%, indicating • Any recession looks set to be mild, though our GDP the economy is not yet in recession. The Sahm rule – that outlook of -0.2% and 0.9% for 2023 and 2024 is lower observes that a 0.5 percentage point rise in unemployment than consensus. over 12 months is a good indicator of recession – has not been • The fall in output should loosen the labour market met, though we forecast this for next year. We also see and alleviate inflation pressures. We forecast inflation recession as consistent with the tightening in financial to fall sharply albeit a little slower than consensus. conditions, which has been sharper than the Federal Reserve • Interest rates appear close to a peak – we estimate (Fed) usually delivers in tightening phases – indeed, the 5% – and are likely to remain at that level until 2024. sharpest since the 2001 and 2008 recessions. A mild recession but growth below consensus Recession or not? We forecast a mild recession, with a combination of weaker The question facing the US is whether or not the economy will consumer spending, business investment and inventory adjustment tip into recession. Our view since the summer has been that it resulting in GDP falling in Q1 to Q3 2023. Thereafter, we anticipate will, and we now expect a recession starting in early 2023. a return to growth but the expected sluggish fiscal and monetary Pinpointing dates is difficult, as recessions typically reflect the policy responses are likely to drive only a modest pick-up, concerted reactions of consumer spending, hiring, investment reflecting the end of the inventory adjustment, a recovery in and inventory – often influenced by external events. Recession real disposable income and firmer business investment. in Europe, prompted by the energy shock as a result of the Ukraine crisis, will be a headwind to domestic activity – though The investment outlook will likely be critical. Corporate profit we believe domestic dynamics will drive the US contraction. growth is likely to decelerate and fall outright throughout 2023 as energy, unit labour and finance costs rise and firms reduce Exhibit 4: Recession over next 12 months seen as likely profit margins. This is likely to lead to a fall in investment. US - 12-month recession probability However, energy investment should rise gradually – part of a Recession YC YC & EBP global realignment of energy supply – which will help raise 100% 1 business investment by end-2023 and into 2024. Residential 80% investment will also be important. This interest rate-sensitive YC & EBP category has reversed quickly from pandemic highs and is 60% expected to still fall across 2023, though not as quickly. YC 40% We forecast GDP to fall from 1.9% in 2022 to -0.2% in 2023, including a mild recession, before rising to 0.9% for 2024. This 20% is below the current consensus outlook of 1.8%, 0.4% and 1.4%. 0% 0 We consider a number of upside risks. Energy could boost 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023 growth further, exceeding our cautious energy investment Source: FRB, NBER and AXA IM Research, 18 November 2022 outlook, or contributing more through liquified natural gas Our recession probability model suggests recession over the exports. The labour market could continue to surprise in its coming 12 months (Exhibit 4). As usual, this has preceded resilience. We expect a small rise in unemployment to 4.5% by declines in survey evidence, for now simply suggesting end-2023 but back to 4.2% by end-2024; more loosening may deceleration. Two factors add to our conviction: First, inventory occur from falling vacancies than actual job losses. We assume has risen sharply since the pandemic. The nature of GDP a somewhat slower fall in inflation but if this occurs more in accounting – measuring the change in change of inventory – 9

line with consensus, the boost to disposable income may be the labour market remains tight, the Fed could tighten further, greater. The boost from pandemic savings may also be larger. while a loosening could see a lower peak. But there are also downside risks. We anticipate a relatively Our expectation of a slower fall in inflation makes us cautious mild inventory correction compared to previous recessions, of how soon the Fed will reverse policy. With core inflation assuming recent supply chain issues create a higher demand for expected well above target and a controlled labour market inventory, but a downturn may still force firms to scale back. loosening, we expect the Fed to keep rates on hold at 5% Delayed policy stimulus could weigh more on the outlook, throughout next year, against market expectations for a cut. alongside the risk of a further tightening in financial conditions. We expect the Fed to begin cutting rates in 2024 and forecast We still envisage a modest rise in labour force participation, an end of year rate of 3.75% (markets predict 3.50%). This despite Congressional Budget Office projections to the contrary would fall short of the 5% cuts seen during previous recessions – overall, we consider the risks to be evenly balanced. (other than the pandemic). However, a mild recession, where unemployment looks set to remain relatively low and inflation Inflation to fall but slower than markets forecast still high, should warrant a more cautious easing in policy. Inflation has been the biggest surprise this year. We forecast an Caution also applies to the impact of the balance sheet. The average 8.2% for 2022 – double the rate we forecast a year Fed is conducting quantitative tightening (QT) at a far faster ago. The Russian invasion of Ukraine accounted for much of pace than before, but Powell suggested a minor impact – that. However, unexpected labour market resilience has led to perhaps equivalent to a 25bp FFR hike per year. While highly ongoing pressure in shelter and services inflation. With our uncertain, we think the QT impact has been exacerbated by the outlook for a modest labour market correction, we forecast a parallel large build-up of reverse repo holdings on the Fed’s slower fall in these components in the coming quarters. balance sheet. The combination has squeezed excess reserves far faster than could have been anticipated. This may unwind We expect a sharp drop in inflation in 2023 and 2024, to next year. If it doesn’t, we expect the Fed to halt QT around average 5.1% in 2023 (4.2% in Q4 2023) and 3.4% in 2024 (3% mid-year, earlier than expected. If it does, a fast unwind could by year-end) (Exhibit 5). However, consensus expectations are boost excess reserves and ease financial conditions further. for inflation to average 4.2% next year and 2.4% in 2024. Either could impact the outlook for rates. Exhibit 5: Inflation to fall, but more slowly than consensus Political outlook: From midterm to long term US - Contributions by broad sector % Rent of primary residence F As we write, the final midterm election results are still 10 Owners equivalent rent of residencies forecast 10 unknown. As expected, Republicans look likely to regain a Non-cyclical services ex-energy 8 Cyclical services ex-energy 8 majority in the House but by a small margin. As we suggested Food and non-alcoholic beverages the Senate was tougher and Democrats have held the majority 6 Goods ex-energy 6 Energy (quarterly average) even before the last race in Georgia is decided on 6 December. Actual US CPI 4 4 2 2 A divided government will mean policy gridlock, with no major bills likely to pass over the next two years. This could have an 0 0 additional impact on a recession because, unlike Europe, the US -2 -2 relies on discretionary fiscal relief, rather than automatic fiscal Q1 2018 Q3 2019 Q1 2021 Q3 2022 Q1 2024 stabilisers, to mitigate a slowdown. A divided government risks Source: Bureau of Labour Statistics and AXA IM Research, 18 November 2022 a slower and smaller stimulus. Tensions may also arise around spending bills and the extension of the debt ceiling. Fed close to peak but far from cut The bigger impact may be on the 2024 Presidential Election. With higher inflation and a resilient labour market the Fed Donald Trump has announced he will stand for re-election but tightened aggressively this year. The Fed Funds Rate (FFR) Trump-backed candidates did not fare well in the midterms, stands at 3.75-4.00% at the time of writing, and as we had weakening his standing. President Joe Biden did better than his expected for some time, Fed Chair Jerome Powell has approval ratings suggested. As inflation falls with suggested it could moderate the pace of hikes from as soon as unemployment forecast around 4% by end-2024, the economy December. We also expect the Fed to tighten more slowly – by may work in his favour. But it is not obvious to us that the 25bps – in February and March next year. We forecast 4.75- President will stand for a second term, which could mean two 5.00% as the peak but contend that labour market new candidates for 2024. developments, rather than inflation, are likely to be critical. If 10

Eurozone – Difficult roads ahead François Cabau, GDP to contract by 1% (from -1.4% previously) between Q4 and Senior Economist (Euro Area) Q1 2023 where both domestic demand and net trade are likely Macro Research – Core Investments to contribute in tandem (Exhibit 6). Hugo Le Damany, Although Germany is making good progress shifting its energy Economist (Euro Area) mix away from Russia, the latest data confirms our initial Macro Research – Core Investments assessment that it is likely to be the most affected of the large 1 Eurozone countries . But indirect (trade) effects imply other Key points countries are unlikely to escape contraction. • We expect Eurozone GDP to contract by 1% between A weak recovery Q4 2022 and Q1 2023, followed by a weak recovery • Limited labour market ramifications imply persistent We think the recovery will feature three key characteristics. (core) inflationary pressures First, the seasonal nature of the supply disruption implies that • We forecast ECB deposit facility rate (DFR) to peak at when capacity comes back online, it will swiftly translate into a 2.5% next March and an initial gradual partial APP bounce in economic activity – whether to fulfil demand or for unwind from next April stock building purposes. This is likely sooner rather than later in • Markets have yet to fully grasp public debt Germany, thanks to the implementation of energy price caps sustainability issues from March and an expected China pick-up, as shown by a positive net trade contribution to growth (Exhibit 6). Growth’s swan song Exhibit 6: A grim growth outlook Eurozone GDP growth by expenditure Eurozone GDP grew by 0.2% quarter-on-quarter in Q3 2022, pp qoqq contrib. remaining resilient despite increasingly alarming forward- 1.0 0.6 0.8 Private cons. Gvt cons. GFCF looking surveys. We think this resilience is mainly due to three 0.8 Inventories Net trade Real GDP factors: ongoing positive impetus from COVID-19 reopening, 0.6 0.2 resulting in a swifter-than-expected convergence to more 0.4 0.2 0.3 0.2 0.2 0.2 0.2 0.2 normal savings behaviour and strength of gross disposable 0.2 income underpinned by a strong labour market. 0.0 -0.2 Amid a highly uncertain macro environment, we think a grim -0.4 outlook lies ahead. Constrained energy supply and faltering -0.6 -0.4 AXA IMResearch forecasts demand are likely to push the Eurozone into a marked -0.8 -0.6 recession this winter while a changing economic structure and Mar-22 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 Source: Eurostat and AXA IM Research, 25 November 2022 tight monetary policy will lead to a sub-par recovery. Monetary policy dominance will generate increasing worries about public Second, the seasonal nature of the shock coupled with supportive debt sustainability, while the future of European Union (EU) fiscal policy should avoid a full economic cycle adjustment. In fiscal rules and the Next GenerationEU (NGEU) package are other words, we expect only a limited 0.7 percentage point likely to bring additional political and policy challenges. (ppt) unemployment rate rise to 7.2% in late 2023 enabling demand to recover modestly, especially when inflation softens An inevitable recession while wage growth accelerates. Our models suggest that negotiated pay growth (excluding bonuses) will reach around We have revised up our GDP forecasts slightly, though continue 4.5% year-on-year from Q2 2023 and surpass inflation which to project the Eurozone economy will contract led by energy will recede to 2.5% in Q4 23, mainly owing to negative base (gas) supply constraints (and/or elevated prices) and weakening effects from energy (more below). Furthermore, the NGEU demand from a historic terms-of-trade shock. However, higher should is likely to support investment despite tight monetary levels of gas storage during a warmer autumn mean severe policy, which will keep the recovery pace below potential. output disruptions are less likely. We now expect Eurozone 1 Page, D., Le Damany, H., Cabau, F., Topa-Serry I. and Adegbembo, M., “The economic impact of a Russian gas cut-off”, AXA IM Macro Research, 30 Sept 2022 11

Third, mending the supply side of the economy – changing the Exhibit 7: Challenging landing at ECB’s inflation target energy mix (especially for Germany) and securing supply chains Eurozone inflation outlook – is a process that will likely take years. While uncertainty runs %yoy high, we think the quantum and/or price adjustment will result 11 10 Euro area headline inflation in a permanent supply shock. The European Commission has 9 Euro area core inflation 8 estimated Eurozone real potential growth between 1.1% and 7 1.2% since 2015 on average, consistent with a 0.3% quarterly 6 5 growth rate. Reflecting the persistent constraints the economy 4 will face, we have pencilled in 0.22% quarter-on-quarter on a 3 2 sequential basis through 2024. We do not expect the Q3 2022 1 GDP level to be recouped until Q2 2024. 0 -1 8 8 8 8 9 9 9 9 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 1 01 20120110120101202 202002202202022 02202022 02202022 02202202 No swift end in sight for ECB’s hawkish bias a-20rJun-2ep-c-ar-20Jun-2ep-c-2ar-20Jun-2p-c-2ar-20Jun-2ep-c-2ar-20Jun-2ep-c-2ar-20Jun-2ep-c-2ar-20Jun-2ep-c- M S DeM S DeM SeDeM S DeM S DeM S De M S De We continue to project headline and core inflation to peak in Source: Eurostat and AXA IM Research, 25 November 2022 Q4 2022 at 10.8% and 5% (annual) respectively. The former is poised to recede swiftly owing to negative energy base effects, Crunch times for Eurozone ahead fiscal measures and an increased inability to pass through input costs as demand falters this winter. We project headline The past decade of falling interest rates has allowed the Italian inflation to drop by around 2ppt year-on-year each quarter, debt management office to lower the implicit interest rate on ending 2023 at 2.5%, consistent with a 5.6% annual average public debt to 2.4% in 2021, maintaining debt maturity to seven next year (8.6% this year). In 2024, an unwind of fiscal years while Italian public debt jumped to 151% of GDP in 2021. measures and likely persistent issues with supply will push Thus, there are some strong firewalls against public debt energy prices moderately higher, to a 2.4% headline average. trajectory rising uncontrollably within the next couple of years, including the fiscally conservative first steps of the new We project a more moderate core inflation retracement of c. government. A continuously decreasing share of non-resident 0.6ppt on average for each quarter of next year, mainly coming bond holders (under 30%) has likely also helped limit market from non-energy industrial goods, while services are likely to pressure so far. prove much more sticky owing to the staggered nature of wage negotiations and the expected resilience of the labour market. However, we think there is likely increased market stress All in, we project euro area core inflation to average 3.8% next ahead. First, there is a clear risk of public deficits overshooting year, only 0.1ppt lower than this year, and stabilising above the next year owing to optimistic government growth forecasts and ECB medium term inflation target at 2.3% in 2024 (Exhibit 7). the possible need to extend energy measures. Second, the Italian government has yet to implement any of its electoral The ECB raised its DFR by 200 basis points (bps) in just three pledges (worth 2%-4% of GDP). Third, our baseline forecasts meetings this year, to 1.5%. We, and the market, expect an are consistent with a primary surplus worth 2.1% of GDP to additional 50bp rate hike in December. With inflation expected stabilise the public debt-to-GDP ratio in 2024 – a high bar. to fall and policy moving towards restrictive territory, Fourth, although gradual, the ECB’s unwind of the APP would frontloading is likely behind us, but it does not mean an end to reduce its high share of holdings (26%). Finally, there are hawkishness altogether. We think the ECB is likely to shift to significant challenges to reaching an agreement on future fiscal 25bp increases in February and in March to reach 2.5%, which rules after the EC issued initial guidelines, which could be would be some way below the peak rate the market is pricing detrimental to fiscal credibility. of 2.9% in mid-2023 – yet still in restrictive territory. After general elections in Greece, Finland and Spain next year, the European Parliament will be up for renewal in spring 2024. The ECB’s policy focus is likely to switch to Asset Purchase By then, we will have more experience of enhanced mutualised Programme (APP) unwind next year. Prior to high level debt in Europe with NGEU in the last third of its expected life. guidelines to be communicated at the December meeting, we Alongside heightened market pressure from challenging public think the ECB is unlikely to make a concrete decision on a path debt trajectories, EU institutions will likely face a renewed before its March 2023 meeting at the earliest. We expect crunch time amid ever-polarised voters. gradual, partial reinvestment, before picking up the pace towards year-end, mindful of already high sovereign funding rates, high public indebtedness and record expected net issuance next year. Although peripheral bond spreads have behaved well so far, we caution against complacency. 12

UK – Navigating troubled waters Modupe Adegbembo Exhibit 8: No more catch-up Junior Economist (G7) Real GDP forecast Macro Research – Core Investments £bn 600 Key points • We expect the UK economy to enter recession this 500 year and forecast GDP growth to average 4.3% in forecast 2022, -0.7% in 2023 and 0.8% in 2024 • Inflation should begin to gradually retrace in 2023, Trend GDP (2012-19) falling towards the BoE’s 2% target in 2024 400 • Interest rates are likely to peak at 4.25% in Q1 2023, Q1 2012 Q1 2014 Q1 2016 Q1 2018 Q1 2020 Q1 2022 Q1 2024 but we expect to see the BoE begin to cut from Q4 Source: ONS and AXA IM Research, 25 November 2022 and across 2024 to end the year at 3% • Political developments remain important, in The Government outlined plans for a sharp fiscal consolidation particular the Northern Ireland Protocol negotiations over the next six years, announcing measures totalling a net remain a risk. £62bn in tightening, despite the impact of energy price caps and recession. This reduces the deficit by £55bn through cuts in spending and increases in taxes. However, energy caps and Recession to give way to sluggish recovery other cost-of-living top-ups sees the fiscal stance loosen this year, compared to a planned tightening in March. It will now The UK economy has been flashing red for months and the tighten less sharply next year, and the bulk of the tightening recent decline in Q3 GDP, exacerbated by an additional Bank now takes place in 2024-2025 and beyond. Holiday, likely marks the beginning of a recession driven by falling consumption, and declines in business and residential BoE first in, first out investment. We expect this to last around four quarters with a peak-to-trough decline of 1%. Following this, we expect The Bank of England (BoE) has increased interest rates by 300 inflation to retrace and alleviate real incomes pressures and for basis points (bps) but the end appears in view. We expect it will consumption to slowly recover. The slowdown is apparent in increase rates by 50bps in December and February, and 25bps levels terms (Exhibit 8) with GDP remaining around its pre- in March to 4.25%. The outlook thereafter, with a growing pandemic level. We forecast growth of 4.3% in 2022, -0.7% in negative output gap and inflation expected to fall below target 2023 and 0.8% in 2024 (consensus 4.2%, -0.5% and 0.8%). towards the end of the forecast horizon, should see the BoE consider loosening policy. We anticipate 25bp cuts in each Labour demand now appears to have turned, lagging declines quarter starting in Q4 2023 bringing rates to 3% by Q4 2024. in economic activity. But a reduction in labour supply has seen The precise timing is likely to depend on the scale of labour unemployment remain low and kept the labour market tight. market adjustment. We see unemployment rising steadily over 2023 and 2024 to peak at 5% towards the end of 2024. We see unemployment Counting down to 2024’s General Election averaging 3.6% in 2022, 4.5% in 2023 and 4.9% in 2024. Negotiations between the European Union and UK on the Energy effects to fade slowly as fiscal stance tightens Northern Ireland (NI) Protocol have resumed as the Government tries to avoid another election in NI. We think Inflation has risen sharply and now stands at 11.1%. We expect second NI Assembly elections by April are likely as the a slow decline in the headline rate, with upside contributions Government seems unlikely to resolve the deadlock. Local from food inflation likely to keep the headline above double elections will also be held in May 2023 but a General Election digits into 2023. The Government’s decision to extend the should be held in 2024. Opinion polls currently suggest a energy price cap beyond March next year will help reduce Labour win. However, in contrast to recent elections, both main inflation over 2023 as a whole. We forecast Consumer Price parties have been forced back to the political centre ground Index inflation to average 9.1% in 2022, 7.6% in 2023 and 2.8% and economic orthodoxy, meaning the next election should be in 2024 (consensus 9%, 6.3% and 2.5%). the least economically damaging for a decade. 13

Canada – Slower activity but avoiding recession David Page exports but we see a fall in 2023. Inventory has also risen Head of Macro Research sharply, particularly in Q2, and threatens a marked reversal. Macro Research – Core Investments Tighter financial conditions will also impact. Consumer spending, dampened by weak real incomes, will come under Key points further pressure as mortgage costs rise. The impact on residential investment should also be marked with home sales • Canada’s GDP growth looks set to slow to a below- falling sharply across 2022 and house prices facing a sharp consensus 0.3% in 2023 and 1.1% in 2024 (from correction next year. We also expect investment to fall as 3.3%). We expect the economy to avoid recession, corporate profits slow. In total, we see growth around flat from but see stagnation from end 2022 to mid-2023 Q4 2022 to Q2 2023 with housing a downside risk. • Inflation should fall to average 4.3% next year and 2.4% in 2024 (from 6.8% this year) Inflation to fall • The Bank of Canada appears close to a peak which we forecast at 4.25% in January, a little sooner than Inflation fell to 6.9% in October, from an 8.1% peak in June. We markets. We expect policy to be kept on hold through expect a more material easing over the next two years, due to a 2023 before rate cuts to 3.25% by end-2024. fall in energy price inflation and a supply chain recovery easing goods price inflation. The speed of the fall will also reflect the house price adjustment - expected to be material next year. We Marked slowdown, but recession should be avoided forecast inflation averaging 4.3% in 2023 (from an expected 6.8% in 2022) and 2.4% in 2024. This is a slightly slower drop Canada looks to be on track to post solid growth in 2022 - we than market forecasts of 3.5% and 2.1%. estimate 3.3%. Yet the bulk of this reflected a re-opening from lockdown restrictions in early 2022 and growth has been more Labour market developments will have a key bearing on subdued since. We expect it to get tougher still. Our forecasts inflation. The labour market is still tight, with unemployment at suggest Canada should avoid recession, instead forecasting 5.2% in October. Employment declined successively until stagnation from end-2022 to mid-2023 (Exhibit 9), with growth September but surged by 108k in October. We expect gradually rising later in 2023 and into 2024. Our 2023 and 2024 employment to fall over the coming months with a rise in forecasts are for 0.3% and 1.1%, below consensus forecasts of unemployment to 6.7% by end-2023 and above 7% in 2024. 0.6% and 1.7% respectively. This is consistent with some recovery in productivity growth. Absent this, high unit labour costs may keep inflation firmer. Exhibit 9: Canada faces stagnation rather than recession Canada - GDP Growth and outlook BoC sooner to peak, sooner to cut? 10% 41.7% 14.3% Forecast The Bank of Canada (BoC) slowed its tightening, hiking by 50bps 5% at its latest meeting. The labour market outlook, more than the inflation outlook, is critical. If employment falls as we expect, 0% the BoC is likely to hike by 0.25% in December and 0.25% in January, taking the overnight lending rate to 4.25%. We expect this to be the peak, a little below market expectations, but -5% saar further labour market resilience could require a higher rate. yoy -12.6% -10% -38% Weak growth, a rising output gap and falling inflation would all 2016 2017 2018 2019 2020 2021 2022 2023 2024 be consistent with the BoC having to cut beyond this point. Source: CANSIM and AXA IM Macro Research, 17 November 2022 Given efforts to curb inflation, we expect the BoC will keep policy tighter for longer to ensure a return to target in 2024. As The slowdown is likely to be driven by three main factors: such, we expect the BoC to remain on hold through 2023, exports, destocking and tighter financial conditions. Export cutting in 2024 by 0.25% per quarter to 3.25% by year-end. A growth is likely to weaken as the global economy is forecast to sharper contraction in the housing market might see the BoC slow to just 2.2%, with key export markets (the US and Europe) ease rates sooner. expected to be in recession or suffering subdued growth (China). Some of this should be mitigated by Canada’s resource 14

Japan – Recovery appears set to continue Modupe Adegbembo excludes only fresh food) is on the rise and likely to peak this Junior Economist (G7) quarter. Government intervention is set to cap the increase in Macro Research – Core Investments inflation in 2023 through additional subsidies on energy. Following this, we expect to see inflation fall in 2024, though companies becoming more willing to pass on price increases to Key points their customers provides some upside risks. We expect CPI inflation to average 2.4% in 2022, 2.1% in 2023 and 1.3% in • Japan’s economy looks set to remain robust – we 2024 (consensus 2.3%, 1.6% and 1.0%). That said, the outlook is forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, for inflation to fall back below the BoJ’s target, with having just 2023 and 2024 respectively risen above target due to extreme external pressure, and far • Wage pressures are rising and evidence of firms short of elevated inflation across the globe. passing on cost increases are growing • We expect the BoJ to remain on hold in 2023, but Wage dynamics in Japan appear to be improving but do not yet positive shifts in pricing norms could see yield curve suggest a significant shift in Japan’s pricing norms and spring wage control adjusted in 2024 negotiations will be key. Rengo, Japan’s largest Trade Union • The next BoJ Governor expected in April 2023 could confederation, confirmed it will request a total pay increase of 5% signal a shift in approach. but final results tend to come in below Rengo’s target – in 2022 Rengo aimed for total pay increase of 4% and achieved 2.2%. Recovery set to continue BoJ: The last dove standing The recovery of the Japanese economy looks set to continue. The BoJ continues to emphasise wage growth as a necessary Growth should be supported by the delayed reopening of the condition to changing its ultra-accommodative policy stance. economy from COVID-19 and a recovery in tourism, with the This has remained the philosophy under Haruhiko Kuroda’s borders of the country now fully open to overseas visitors. The governorship, but things may change following the positive growth momentum will be tempered by slowing external appointment of a new Governor in April 2023. Deputy demand – we expect recession in Europe and the US and Governor Masayoshi Amamiya and ex-Deputy Governor Hiroshi below-trend growth in China in 2023. In 2024 we expect Japan Nakaso are seen as frontrunners. Nakaso is widely seen as to continue catching up to its pre-pandemic trend (Exhibit 10). more in favour of reducing monetary stimulus and his We forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, 2023 appointment would raise the risk of a change in policy from Q3 and 2024 respectively (consensus 1.5%, 1.3% and 1.1%). 2023 after the spring wage negotiations. We currently still do not expect the 2% inflation target to be achieved in a Exhibit 10: Growth continues to recover sustainable manner during our forecast horizon, but we expect Japan: GDP growth contributions the post-Kuroda BoJ to adjust the ultra-accommodative yield %yoy curve control (YCC) policy after taking into account recent 3.0 inflation, shifts in expectations and a gradual rise in wages. 2.0 1.0 In terms of timing, we believe a decision to change BoJ policy is 0.0 unlikely before the spring 2023 wage negotiations. But weaker -1.0 global economic conditions could see the BoJ proceed -2.0 Consumption cautiously and only tweak policy early in the following year -3.0 Government -4.0 Fixed investment when external conditions improve. In addition, we expect the Inventories BoJ to wait for clearer evidence that underlying inflationary -5.0 Net Trade pressures are growing and to see if core inflation remains -6.0 above previous levels once the energy shock dissipates. We 2019 2020 2021 2022 2023 2024 Source: Refinitiv and AXA IM Research, 25 November 2022 expect the BoJ to shift the YCC target of around 0% plus or minus 25 basis points (bps) on 10-year Japanese government Inflation spike to fade, but price pressures growing bond yields to +/-40bps and to make this move in early 2024. Yet this is a finely balanced call and we see risks skewed to the Inflation is set to remain above the Bank of Japan’s (BoJ) target BoJ remaining on hold throughout 2024. in the near term with a weak yen adding to inflationary pressures. Core Consumer Price Index (CPI) inflation (which 15

China – A bumpy path to reopening Aidan Yao mutate turning the pandemic to endemic, which may already Senior Economist (China) be the case outside China. Second, and related, the medical Macro Research – Core Investments response has to adapt for a long fight against a constantly changing enemy. The brutal lockdown in Shanghai, which brought China’s largest city to a standstill, was a painful lesson Key points that achieving zero infections against a highly transmissible virus will inflict tremendous economic and social costs (Exhibit 11). • China’s economic outlook continues to hinge on the Calls for an exit from the Zero COVID Policy (ZCP) have since path of the pandemic and Beijing’s response grown as China becomes isolated from the rest of the world. • We expect the authorities to pave the way for a reopening, but that path will be bumpy and uncertain Exhibit 11: Economy at the mercy of the pandemic • Falling exports – partially offset by a less bad property China - Covid lockdown index and impact on activity market – call for continued policy accommodation Index % of GDP 90 0 80 -1.7% -5 70 -4.8% COVID-19 response fails to keep up with virus 60 -8.6% -10 50 Annual average impact -15 Three years into the COVID-19 pandemic, while most countries 40 Lockdown index [Lhs] -20 have exited emergency responses, China remains wedded to a 30 Impact on growth [Rhs] -25 rigid containment strategy. 2022 was a particularly difficult year 20 for the Chinese economy, with the impact of rolling lockdowns 10 -30 exacerbated by a collapsing housing market and stiffening 0 -35 external headwinds – manifested in rising food and energy Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2022 Jul-2022 prices, escalating geopolitical tensions, and tightening global Source: CEIC, Goldman Sachs and AXA IM Research, 16 November 2022 financial conditions. Beijing has tried to mitigate these shocks by easing counter-cyclical policies and finetuning its COVID-19 Beijing’s reluctance to change is likely a result of three response after the Shanghai debacle. But those moves have considerations. Medically, China is not ready to exit the ZCP failed to prevent a steep decline of economic growth. With with a low immunity rate among its vast population and limited annual GDP gains expected to more than halve to about 3% medical resources, which could prove insufficient to deal with from 8.1% in 2021, Beijing is set to miss its growth target for increased severe cases upon reopening. Economically, the ZCP the second time in three years. had been seen as a success not long ago for contributing to China’s growth outperformance and gains of export market The outlook for the economy will continue to hinge on the share before this year. Finally, altering a policy, extolled as an emblem of China’s superior governing system ahead of a once- evolution of the pandemic and Beijing’s response. Continuing in-a-decade leadership reshuffle, was seen as unwise politically. with draconian controls against repeated COVID-19 flare-ups will likely prolong the economic stress, creating permanent scarring These arguments, however, have been weakened by recent in the economy and society. The housing market remains a wild events. The economic calculation has clearly shifted, reflected card, as it struggles to find a bottom against depleting home- by the higher costs of tackling Omicron compared to the Alpha buyers’ confidence and acute financial stress among property or Delta variants. Meanwhile, the conclusion of the 20th Party developers. Exports – once a strong engine of growth – have also Congress has helped remove a major political uncertainty and started to sputter and will likely lose further steam as developed economies fall into recession. These challenges will complicate refocus the party’s attention on its core objective of delivering Beijing’s counter-cyclical policies and make next year’s outlook growth and prosperity. The remaining hurdle is weak medical more uncertain than usual. Below, we explain in detail these defences. Hence, moves to build such a defence should be seen four drivers of the economy and the risks to our assessment. as preparation for an exit from the ZCP. Changing tack to reprioritise the economy Our baseline view for 2023 rests crucially on the assumption that the ZCP will be adjusted for an eventual reopening of the economy. We see this proceeding in three phases. Phase one Starting with the pandemic, developments over the past year focuses on getting the public medically and mentally ready for a have likely brought two revelations to Beijing. First, the virus is change. This involves raising the vaccination rate (particularly unlikely to disappear any time soon, and could continue to for the elderly), introducing antiviral drugs, constructing more 16

field hospitals, and reshaping public consensus to ease people’s since 2020, export activity has faltered lately and is expected to fears of the virus. These changes are already underway and the contract as developed economies slide into recession. In latest announcement from Beijing of 20 measures to fine-tune addition, rising geopolitical tensions between China and the US the COVID-19 strategy suggests more is to come. Phase two – notably in the area of advanced technology – could further puts the emphasis on reopening the domestic economy by impact an already soured trade relationship. The loss of this easing social and mobility restrictions, reducing mass testing, export growth contribution could add to the urgency for Beijing and abandoning the frequent use of ‘static management’. A to ease COVID-19 controls to revive domestic demand. broad liberalisation within China is assumed to be reached by the middle of next year. The final step is to open the border Better transmission improves policy efficacy with the rest of the world through successive reductions of quarantine restrictions for visitors. The multitude of economic headwinds call for continued accommodation from China’s counter-cyclical policies. It is important to reiterate our long-held view that no official Compared to this year, policy efficacy may improve in 2023 if announcement on ending the ZCP will be given until, perhaps, easing COVID-19 controls and stabilising property market can full liberalisation is achieved. But under the ZCP banner, we see help to unclog policy transmission channels. On the monetary the emphasis shifting from achieving zero infections at all costs side, the room for aggressive easing is limited by concerns to ‘dynamically adjusting’ the strategy to reprioritise economic about currency depreciation and capital outflows, while normalisation. Investors therefore need to pay more attention tightening is unlikely given the uncertain path of the economy. to what Beijing does than what it says. Incremental policy exit is possible later in the year only if economic reopening proceeds smoothly. Fiscal policy will likely There is however considerable uncertainty around this baseline stay supportive too, but Beijing may struggle to repeat some view. It is entirely possible that the fear of exposing China’s vast ad-hoc, frontloaded, stimulus implemented this year given the unvaccinated population to a virulent virus continues to hold already stretched fiscal balance sheets of local governments. Beijing back from reopening. And even if the ZCP is adjusted, With reduced potential for conventional stimulus, there are the path could be bumpier than hoped. Too slow a change will few options left to bolster growth other than freeing the do little to save the economy, while too fast an exit could lead economy from the grip of the pandemic. to surging infections and hospitalisations that overwhelm the public health system. The ensuing social backlash could set back Exhibit 12: Dissecting our growth forecast for 2023-2024 the reopening and economic recovery. We have built a cautious China - Breakdowns of growth projections forecast – including a negative quarter of growth followed by 10% 8.1% only a partial recovery – to account for potential hiccups in this 8% 5.0%4.8% 6% 3.0%3.0%1.0% 0.5% -1.0% transition, but the actual path ahead could be bumpier still. 4% 2% -1.5% 0% -2% Property and exports switch sides -4% 1.2% -6% -5.0% -0.7% -8% -10% -3.6% 3.0% Besides the pandemic, the ongoing property market turmoil -12% h D ty l ry st D ty ry l st st has also rattled the economy and financial markets. Fears of owt VI TradeFiscata eca VI a TradeFiscaecaeca contagion to the household sector and banking system – grPCO Proper Mone forCO ProperMonet for for following the mortgage boycott instance – prompted the 1D G GDP GDP GDP authorities to ease property policies. But this was barely 220 022 023 024 2 2 2 enough to slow the deterioration of conditions. The good news Source: CEIC and AXA IM Research, 16 November 2022 is that the policy wind has shifted further with Beijing now Exhibit 12 shows how our above-consensus 5% growth forecast taking more substantial steps to ease developers’ funding stress. The bad news is that there are no easy fixes to the for 2023 is derived. This is followed by a slight moderation to structural imbalances, with an overhang of housing supply in 4.8% in 2024 as the economy reverts to trend. The biggest lower-tier cities and excess leverage at many private-sector swing factor in our forecast is the ZCP, which offers a two-sided developers. After abruptly pricking the bubble, Beijing now risk. However, we consider the chances of inaction, or delayed must manage its fallout. We expect further policy support to action, from the authorities as greater than proactive action. In stabilise the market next year, helped by easing COVID-19 an adverse scenario of China continuing its current pandemic controls. But there will unlikely be a vigorous rebound of response for another year, we think the economy would suffer activities until structural challenges are tackled. from deeper economic scarring and further reduced space for counter-cyclical policy. Annual growth could fall to 3.5% or The external sector is set to become less supportive of the lower in that scenario even with the help of a low base. economy next year. After acting as a solid engine of growth 17

Emerging Markets – Darkest before dawn Irina Topa-Serry, higher reliance on external financing. In recent months, Sri Senior Economist (Emerging Markets), Lanka suspended its foreign debt payments, Ghana is expected Macro Research – Core Investments to restructure its debt to qualify for assistance from the International Monetary Fund, El Salvador experienced high solvency risks, Egypt is striving to cover its balance of payment Key points gap and currency devaluations are looming in Kenya and Nigeria. More broadly, many frontier market governments are • Domestic and external headwinds will trigger a forced to rely heavily on external debt which, along with an marked slowdown in emerging markets, with Chile increase in debt service costs, makes them vulnerable to and Central European countries in recession. currency moves which could ignite sovereign crises. Rising Recovery should start in the second half of 2023 inflation, falling currencies and higher food import bills mean • External liquidity conditions for frontier markets have the odds of balance of payment crises are rising as the level of materially worsened. High inflation raises the odds of foreign exchange reserves become inadequate. Social unrest – food insecurity and social unrest linked to food insecurity – is a clear risk, that new multilateral • Turkey is walking a tightrope, hoping to avoid a emergency financing lines are trying to avoid. currency crisis before the next elections. Central and Eastern Europe in recession Growth headwinds in EM abound High inflation is weighing on household purchasing power while tighter credit conditions will hurt fixed investment in Central Economic activity in emerging markets (EM) again proved more and Eastern Europe, at a time when a winter energy supply resilient than expected through most of 2022, prompting crisis will be pushing Europe into recession. The timely upward adjustments to GDP growth forecasts for the full year. disbursement of European funds will be critical to the growth But as we head into 2023, economic activity will be affected by profile. Poland and Hungary are yet to achieve the milestones the sharp tightening of financial conditions, while external imposed by the EU Commission – which could delay Poland demand will weaken as advanced economies are expected to receiving the funds until 2024 while Hungary could potentially slow. China is the brightest part of the EM story, but its COVID- lose 70% of the resources. However, despite the region’s 19 re-opening path is fraught and likely to prove less of a driver forecast recession, central banks need to maintain a tight policy for EM commodity demand than during past economic stance in order to anchor inflation expectations and limit recoveries, as it is now more services-oriented. currency depreciation given widening current account deficits. With fiscal tightening in sight post-2022 elections, high policy Policy mixes will be increasingly less supportive, with central rates and severe recession ahead, Hungary is the only central banks likely inclined to keep rates higher for longer, similar to bank in the region that we expect to ease policy in 2023. expectations from major developed market central banks, while price indexation mechanisms may be an obstacle to Turkey likely to pivot, willingly or not disinflation. Brazilian and Hungarian central banks are likely to be the first to pivot by end-2023. Fiscal policy space has been At odds with global synchronous monetary policy tightening – reduced by the exceptional COVID-19 efforts. Additional and all the more worrying given its high inflation, rising external measures taken to limit the inflation effect on household financing needs and declining currency reserves – Turkey has balance sheets will gradually be removed across 2023-24. All in been cutting policy rates. The currency has been supported by all, we expect EM (excluding China) GDP growth to decelerate the central bank’s ‘liraization strategy’ which restricts capital sharply on a sequential basis in Q4 2022 and Q1 2023, and then mobility and forces banks to buy government bonds. Without a slowly improve into the second half of 2023 and more so in much lower energy bill or much weaker currency helping to 2024 as external and domestic conditions normalise. curb the non-oil deficit, the overall current account deficit is likely to widen beyond 5% of GDP. Two-thirds of capital Rising vulnerabilities for low-income countries account financing relies on unidentified ‘net errors and omissions’ but is needed to avoid an outright currency crisis The external backdrop has remained a headwind for EM before mid-2023 elections. At that point, we believe the central countries overall, but lower-income countries, usually referred bank will pivot to monetary orthodoxy, with policy rates likely to as frontier markets, have been significantly impacted by raised to around 15%-20%, which should trigger a contraction tighter global financial conditions, reduced liquidity and a much in growth but also a gradual reabsorption of imbalances. 18

Emerging Asia – A soft landing despite growing external headwinds Shirley Shen, We expect domestic activity to drive the region’s growth in 2023. Economist (Emerging Asia) Recent data has pointed to a strong growth rebound in private Macro Research – Core Investments consumption, which we think will continue, albeit more gradually. Unemployment rates have fallen from the peak and border reopening has brought tourists back to the region. Despite the Key points continued absence of Chinese visitors, exports of services should provide a growing tailwind for economies that rely on tourism. • Growth expected to soften on weakening exports and heightened external headwinds Goods exports have softened this year, but by less than feared, • Most central banks to pause tightening from March thanks to strong demand for lower-end chips and commodity next year due to falling inflation and weaker growth exports from a few resource-producing nations. However, export • Escalation of geopolitical tensions remains a risk, growth will come under further pressure as developed exacerbating already vulnerable external positions economies enter recession. In addition, external positions have deteriorated for some, with a widening of current account deficits in India, Philippines and Thailand. Currencies have also depreciated sharply against the dollar, prompting central banks A weakening growth outlook to intervene to defend their exchange rates, which ends up eroding currency reserve buffers. These external vulnerabilities, Slowdown in developed market (DM) economies and China, if prolonged, could affect the operation of domestic policies, coupled with tightening global monetary conditions, have complicating the growth and inflation outlook. created headwinds for the economic recovery in Asia in 2022. Meanwhile, domestic consumption and services recovered Monetary tightening approaching an end strongly throughout the year following the easing of COVID-19- related restrictions and border reopening (Exhibit 13). Export Price pressures have risen significantly across the region since momentum is set to weaken further in 2023 as reduced DM the onset of the Russia-Ukraine conflict. In many instances, demand is expected to be only partially offset by a modest inflation has risen to multi-decade highs. Recent outturns, recovery from China. This will pressure the export-dependent however, show that price pressure has started to ease and will economies of the region, including South Korea, Taiwan and likely fall further in 2023 on slowing economic growth, easing Singapore. However, commodity exporters such as Indonesia supply chain bottlenecks and monetary tightening. However, and Malaysia should still benefit from elevated energy and raw risks still remain. Core inflation could stay sticky in countries material prices. In contrast, domestic-oriented economies may like India, the Philippines and Indonesia, with upside risks to prove more resilient, thanks to a further recovery in food prices from adverse weather events. Moreover, currency consumption and services activity. Overall, we forecast depreciation could add imported inflation to some economies. economic growth for Asia ex. China to moderate to 4.5% from 5.2% this year before edging up to 4.8% in 2024. From a policy standpoint, a gradual easing of inflation and slowing economic growth should limit the extent of further Exhibit 13: Growth anchor has shifted away from exports monetary policy tightening. In our base-case scenario, most Asia auto sales growth vs. exports growth Asian central banks are expected to press pause from March %yoy %yoy 2023, barring a major surprise from the Federal Reserve (Fed). 30 Auto sales [Lhs] 32 25 Meanwhile, fiscal consolidation is expected to proceed Exports [Rhs] 27 cautiously, as authorities exit from the generous policy support 20 provided during the pandemic. Such gradualism is warranted as 15 22 economies slow and growth risks bias to the downside. 10 17 Thailand and India face general and state elections respectively 5 in 2023. In general, we expect policy continuity with the 0 12 governments continuing to pursue economic re-opening to -5 7 recoup the losses from the pandemic. However, a further Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 escalation of geopolitical tensions globally could lead to higher Source: CEIC and AXA IM Research, 18 November 2022 commodity prices and risk aversion, posing a risk to Asia’s already fraying external position. 19

Latin America – Rude awakening Luis Lopez-Vivas, inflation there is firmly on its way towards target. In Chile, there Economist (Latin America), is a high probability that the economy will fall into recession, Macro Research – Core Investments which would prompt the central bank to ease policy. Mexico and Colombia will likely be the laggards in this regard and will have to wait until Q4 2023 to start cutting rates. Inflation is still Key points running hot in Colombia, reflecting its booming economy, while Mexico will have to wait until the Fed adopts a more dovish • Growth is expected to slow next year amid an stance before cutting, to avoid capital outflows. unfavourable external environment before picking up again in 2024 Policy uncertainty to hurt investment • Central banks could start easing monetary policy towards the second half of next year While the election season is finally over, we still expect policy • Policy uncertainty will dampen investor sentiment. uncertainty to remain elevated across the region. Both Colombia and Brazil recently elected left-wing presidents with plans to address issues such as climate change and social Clouds on the horizon inequality. However, they have yet to provide blueprints to make these plans viable for their countries, which is weighing on investor sentiment. In Colombia, President Gustavo Petro Despite significant monetary and fiscal tightening, most major has promised to put an end to the vital oil industry, but has Latin American countries saw better-than-expected economic proposed no alternative to replace the revenues the sector growth this year. Diverse factors such as high commodity generates. In Brazil, President-Elect Luiz Inácio Lula da Silva prices, strong US import growth and a vigorous recovery in the plans to tackle inequality by removing the fiscal rule and service sectors should allow the region to outpace global boosting government spending at time when the debt ratio is growth in 2022 (3.5% vs. 3.2%). However, Latin America is in for already close to 90% of GDP. Meanwhile in Chile the debate on a rude awakening as a more unfavourable external constitutional reform will continue after citizens rejected a new environment is likely to cause the region’s growth to slow draft in September. This creates a degree of uncertainty over below trend next year. Latin America’s two main trading how and when the new constitution process will conclude and partners, the US and China, should both see weak growth next what it will mean for key policies towards the mining industry year, which will have a negative impact on commodity prices and the overall fiscal policy of Chile. Finally in Peru, the and remittances, important growth engines for the region. embattled President Pedro Castillo has already survived two Similarly, tighter global financial conditions will further weaken impeachment attempts but it is unclear if his administration capital flows into Latin America and increase financing costs for will manage to hold on to power next year. sovereigns and corporates. Domestically, monetary and fiscal stances will remain tight. In addition, private consumption Risks to the outlook should lose momentum, impacted by high inflation, and policy uncertainty should keep a lid on investment. In this context, Looking ahead, the balance of risks to our outlook is tilted to growth in the region is poised to decelerate to 1.7% in 2023 the downside. A deeper recession in the US or slower growth in and bounce back to trend growth in 2024, reaching 2.4%. China, reflecting COVID-19 lockdowns, would significantly weaken commodity prices and lower remittances. Moreover, a Cautious monetary policy ahead more hawkish Fed could severely push up bond yields and worsen the already-fragile fiscal situation in Latin America. On Thanks to an early and aggressive hiking cycle, inflation has the domestic front, entrenched inflation would dent private peaked in most countries in the region and is starting to decline. However, we expect inflation to remain above target consumption and delay the central banks’ ability to ease monetary policy. Similarly, high inflation amid an economic for most of next year due to the lagged effects of monetary slowdown could spark social unrest in the region. In terms of tightening and second-round effects as higher energy and food upside risks, Latin America could benefit from ‘near-shoring’ prices are passed through into core prices. Considering the efforts, particularly if the war continues and tensions with persistence in inflation and the Fed’s ongoing tightening cycle, China remain high. In addition, there is the possibility of higher- central banks will have to be extremely careful in any loosening than-expected productivity growth as a result of increased of monetary policy. We expect Chile and Brazil to be the first digitalisation during the pandemic. countries to cut policy rates by the start of the second half of next year. Brazil was the first to start hiking in March 2021 and 20

Currencies – US dollar a fading star Romain Cabasson, same time, better risk sentiment and lower uncertainty on Head of Solution Portfolio Management, rates will pose a challenge to the US dollar (Exhibit 14). Multi-Assets – Core Investments The yen’s moment to shine Key points October’s US Consumer Price Index (CPI) inflation report gave a taste of what to expect. Risk sentiment rebounded, and high- • A Fed pivot is certainly getting closer and will mark an beta currencies benefited. The Japanese yen outperformed – inflection in US dollar trajectory, though not a not only was it largely undervalued to start with, but collapse. The yen should be the main beneficiary expectations of the Bank of Japan (BoJ) are suppressed, so the • If a hard landing is avoided along the way, high beta real rate differential could only move in its favour (Exhibit 15). currencies should also manage to rebound • The euro and sterling are facing new structural Exhibit 15: Euro expensive vs PPI, yen cheap by all measures challenges that may not disappear any time soon CPI and PPI based REER value - average • The renminbi should also lag, given China’s difficult 40% USD CPI EUR CPI JPY CPI GBP CPI 30% CHF CPI USD PPI EUR PPI JPY PPI exit from COVID-19 and softer global demand. 20% 10% All eyes on the Fed 0% -10% The US dollar has dominated 2022. Rising inflation pressures -20% -30% following post COVID-19 re-openings, supply bottlenecks and -40% the Ukraine war’s consequences have forced all major central Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22 banks to tighten monetary policy. But the US economy has Source: Bloomberg and AXA IM Research, 22 November 2022 been in a much better cyclical position and the Federal Reserve (Fed) has tightened by more, facing sharper domestic inflation Nonetheless, for the very short term, market reaction looks pressures and less damage from external energy costs. The slightly excessive. More data is needed to confirm an inflation simultaneous withdrawal of easy global monetary policy fuelled softening and we expect the Fed to push back in between. But concerns on global growth and valuations, triggering safe- beyond any short-term dollar rebound we expect the yen to haven flows. Those two factors have supported the dollar and strengthen in 2023. BoJ Governor Haruhiko Kuroda is leaving left little room for differentiation between other currencies. office in April, leaving some room for hawkish market speculation. Domestically, a demand boost from reopening Exhibit 14: What’s driving the US dollar, real rates or volatility? should emerge and additional fiscal support is being deployed. DXY vs real rates differential and US rates volatility 150 % 120 Trapped in the energy prices gravity field 1Yx10Y US rate implied volatility [Lhs] 115 130 94,6 + 10,6 x (US - average) 10Y real yield 110 The geopolitical consequences of the Ukraine war have created 110 (EUR, GBP, JPY, AUD, CAD, SEK) [Rhs] 105 durable pressure on energy costs, pushing the EU and UK to 90 DXY [Rhs] 100 reposition their energy dependencies (Exhibit 16). 70 95 90 Exhibit 16: Fading trade balances of large energy importers 50 85 Trade Balances as % of GDP 30 80 12% US EU CH JP GB AU Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 10% Source: Bloomberg and AXA IM Research, 22 November 2022 8% 6% All eyes are now anxiously looking for any signs of softening in 4% 2% inflation pressures in the US that could lead to a pivot in the 0% -2% Fed’s stance. Although difficult to call, that moment is probably -4% getting closer. But this is unlikely to translate to a collapse of US -6% real rates. Expectations of other central banks will also adjust -8% accordingly, reflecting global inflationary pressures. But at the Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22 Source: Bloomberg and AXA IM Research, 22 November 2022 21

The EU manufacturing sector’s competitiveness is particularly Cross assets – The year of the bond challenged, as seen in the sharper rise of Producer Price Index (PPI) inflation that has brough the euro into overvalued territory, while the trade surplus has faded as higher energy Greg Venizelos, import costs and lower exports weigh. UK twin deficits proved Macro & Credit Strategist, problematic in September in a tighter liquidity environment, Macro Research – Core Investments constraining the UK government into fiscal austerity in a recession. With such structural weaknesses, the euro and Key points sterling should only marginally benefit from the dollar cooling in 2023. The Swiss franc should hold up better, given Switzerland’s lower energy dependency. • Investors can get higher yields for less risk as interest rates are at their highest in 15 years. This should lead Black hole scenario to a positive outcome for fixed income in 2023 • The proverbial 60:40 portfolio has had its second- High-beta currencies should benefit from the better risk worst year in 45 years. Previously, major negative sentiment that a Fed pivot would trigger. Australia, Canada and years have been followed by a string of positive years. Norway exports are also benefitting from higher energy prices, with Australia reaching a current account surplus. But those A twice-in-a-generation portfolio outcome countries also have much higher leveraged households, and the risk of a hard landing from rising mortgage rates is greater. In Monetary policy can often be more art than science. While the comparison, the EU and US have most mortgages fixed until accepted wisdom is higher rates undermine growth and help maturity. Australia and Sweden are particularly exposed with bring inflation down, the precise mechanisms and timings are high debt levels and a very high proportion of variable rates. still not self-evident. In the US, the Fed will have raised rates Australian demand seems to be solid so far, absorbing the more in a year than at almost any time since the early 1980s. shock. But Swedish households do not appear in good shape That should prove enough to tame inflation and lead to a and house prices are already adjusting sharply (Exhibit 17). As positive outcome for fixed income in 2023 given yields are at such, the krona should lag other high-beta currencies. their highest in 15 years. Investors can get higher yields for less risk than was the case in recent years and returns in bond Exhibit 17: Rising mortgages: Higher pain for Swedish households markets are very unlikely to be negative for a third consecutive Household sector metrics across countries 15% 600% year. Despite all the concerns about market liquidity, central 10% 400% bank balance sheet reduction and risks of defaults and downgrades, 2023 should the year of the bond. 5% 200% 0% 0% Exhibit 18: The proverbial 60:40 portfolio has had its second- -5% -200% worst year in 45 years Real retail sales yoy [Lhs] Return of S&P500 & UST 60:40 portfolio -10% Real wage growth yoy [Lhs] -400% 40% House prices yoy [Lhs] 20% -15% - Household Debt, % of net disposable income [Rhs] -600% EUR USD GBP AUD CAD SEK 0% Source: Bloomberg and AXA IM Research, 22 November 2022 -20% -40% Zero-COVID-19 policy through the vacuum hatch -60% -80% The divergence between the Fed and the People’s Bank of China (PBOC) weakened the yuan in 2022. This should hold as -100% real estate deleveraging is ongoing and prevents financial -120% inflows from returning. China is now looking at exiting its ‘zero- 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 Source: Bloomberg, ICE and AXA IM Research, 22 November 2022 covid’ strategy but reopening without proper vaccination or immunity is challenging. Also, the trade balance will come The proverbial 60:40 portfolio of 60% equities-40% bonds has under more pressure from global demand softening and from had its second-worst year in 45 years (Exhibit 18). Historically, higher imports upon domestic reopening. And although it depreciated against the dollar, the yuan is still strong against major ‘down’ years like 2008 or 2002 have been followed by a the currencies in the China Foreign Exchange Trade System string of ‘up’ years, implying a positive outcome in 2023 unless basket and the PBoC might tolerate some weakness. equities drop by high double digits. 22

Rates – Shadows and Lights Alessandro Tentori, market volatility are a testament to this assumption. Only AXA IM Southern Europe CIO and Rates Strategist, recently has the perception of inflation changed, as our Macro Research – Core Investments collective understanding about the origins of this episode has improved. Nonetheless, market-based inflation expectations have been formulated to reflect the ‘credible disinflation’ Key points hypothesis. They still are. Most likely, this is a direct result of central bankers’ dedication to preventing inflation expectations • Fixed income markets have been in a state of from becoming unanchored. The speed at which market-based transition between two distinct environments US inflation expectations converge to 2% (Exhibit 20) goes • This transition from low to high inflation has been a beyond what can be reasonably predicted on the basis of oil stressful period for investors price futures. The picture is a bit different in Europe and in the • To tackle the high-inflationary backdrop, central UK. In particular, it’s the quality of inflation that is different: bankers have switched to an aggressive policy stance Eurozone inflation seems to be less sensitive to monetary • Looking ahead, central banks’ balance sheet policy than US inflation, thus providing the Federal Reserve transition is a major source of risk for bond investors with an edge over the European Central Bank (ECB). Hence, • Positively, investors will be constructing portfolios European inflation is at risk of drifting even higher as producer with a short-term risk-free rate around 4.5%. price pressures pass through the inflation pipeline. Exhibit 20: All good on the inflation front, says the market Every transition creates stress Market-based inflation expectations 9.0% Fixed income, and especially interest rate markets, have been 7.0% subject to significant stress during 2022 (Exhibit 19). Investors 5.0% have been exposed to a period of transition between two 3.0% distinct environments. Previously investors had been enjoying a 1.0% backdrop of low interest rates, low volatility, almost absent Spot 1y 1y1y 2y1y 3y1y 4y1y 5y1y inflation and unprecedented support from monetary policy. But EUR 5.7 2.2 2.2 2.1 2.2 2.2 now they are contending with the complete opposite – inflation USD 2.8 2.6 2.6 2.6 2.6 2.2 levels not seen for decades, aggressive interest rate hikes by GBP 8.6 4.1 3.9 3.9 3.9 3.9 central banks and large swings in volatility. As in any transition, Source: Bloomberg and AXA IM Research, 22 November 2022 the level of stress and uncertainty has been extensive, often affecting market liquidity and sometimes even market Assessing rate expectations: Where is neutral? functioning. But just how long will this transition continue? Assessing monetary policy’s stance is by no means an easy task, Exhibit 19: A challenging year for rates especially coming out of a prolonged period of ultra- Global swap rates low/negative interest rates and quantitative easing (QE). 7% Several models of the equilibrium real interest rates have been EUR 10y USD 10y JPY 10y proposed in the past, each with their own shortcomings. In 5% Forwards addition, analysts are left with the choice of an average inflation rate, which may not necessarily reflect a central bank’s 3% target. For example, the annual variation of euro Harmonised Index of Consumer Prices (HICP) has averaged only 1.3% 1% between 2009 and 2020. A naïve market-based approach is certainly not devoid of criticism but it offers a readily -1% observable monetary policy stance nonetheless. In Exhibit 21, 2002 2005 2008 2011 2014 2017 2020 2023 2026 we show the difference between the overnight interest rate Source: Bloomberg and AXA IM Research, 22 November 2022 and one-month interest rate 5 years forward, which we chose Are inflation expectations too optimistic? as a representation of the ‘neutral’ nominal rate over the business cycle. The QE/negative rates period does not beg Market participants and central bankers have underestimated further discussion, while the more recent past tells us a story of inflation risks for a few quarters. Extra-large rate hikes and high two central banks: The Fed initiated its tightening cycle a few months ahead of the ECB and has already driven monetary 23

policy in excess of a neutral interest rate level. Of course, this collateral availability will improve almost mechanically. Liquidity does not mean that the Fed will stop here, but rather the ‘hike conditions in global government bond markets might need at any cost to prevent falling too far behind’ mentality might more time to improve, though, also because we do not now be replaced by a more traditional, data- and forecast- anticipate a change in bank regulation anytime soon. based approach. On the other hand, the ECB looks to be still short of reaching a neutral stance and might have to keep the The dynamics of central banks’ balance sheets probably pressure on inflation breakevens – the difference between explains part of the ‘term premium puzzle’, i.e. the apparent yields on a nominal bond and an inflation-linked bond – insensitivity of Treasuries’ term premium to either higher irrespective of the business cycle, if inflation were to stay at interest rates or higher volatility. Theoretically, investors should unpleasantly elevated levels. require a higher compensation for their duration risk in an environment of higher and faster moving rates/yields. While Exhibit 21: Monetary policy stance this seems to be the case for European government bonds, our Spread between O/N rates and 5y1m OIS calculations show that’s not yet the case for the US Treasury 1.0% market (Exhibit 23). One explanation could be linked to the 0.5% Neutral policy stance 0.0% Fed’s duration extraction in a homogeneous bond market, -0.5% -1.0% which is rather different from ECB’s duration extraction in a -1.5% heterogeneous bond market. -2.0% -2.5% Exhibit 23: The term premium puzzle -3.0% -3.5% Term premium estimates -4.0% Fed 2.0% -4.5% Tighter policy stance ECB US -5.0% 1.5% 2007 2009 2011 2013 2015 2017 2019 2021 2023 1.0% EU Source: Bloomberg and AXA IM Research, 222 November 2022 JN 0.5% Central banks’ balance sheets and the term premium 0.0% -0.5% All else equal, the next 12 to 24 months are likely to challenge -1.0% the demand/supply balance established during the QE period. -1.5% Central banks’ almost dominant role in their respective 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 sovereign markets (Exhibit 22) is likely to fade in time, albeit Source: Bloomberg and AXA IM Research, 23 November 2022 gradually, thus putting pressure on the existing investor base. However, as net supply flips from very negative to very positive, Looking into 2023 the key questions will be – who is going to buy? How much are they going to buy? And at what price? If anything, 2023 should starts with a certainty – income will play a role in investors’ allocation. The market value of negative Exhibit 22: Looking for a new demand/supply balance yielding debt has collapsed to a mere 3% of the global Total CB assets as % of GDP aggregate index, coming from almost 27% at the end of 2020. 150% In other words, constructing investment portfolios with short- Fed term risk-free yields around 4.5% is a totally different 100% ECB proposition compared to starting with only 0.15%, as was the BoJ case at the end of 2020. BoE 50% Unfortunately, 2023 also carries several unknowns, from inflation to the business cycle, from central banks’ reaction function to the speed of balance sheet reduction. Luckily, these 0% are ‘known’ unknowns, in the sense that we already have them 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 on the radar screen, albeit perhaps still unable to properly Source: Bloomberg and AXA IM Research, 22 November 2022 quantify them. Leaving ‘unknown’ unknowns aside, an Liquidity issues and brief episodes of dysfunction have already asymmetric policy mix might be yet another source of risk for been observed in some market segments, while collateral bond markets. We’ve witnessed the challenges of an scarcity has affected the relative pricing between European expansionary fiscal and a restrictive monetary policy not only in government bonds and swaps, i.e. agreements between two the UK this year, but also on the US market towards the end of counterparties to exchange assets or cashflows. As the ECB President Jimmy Carter’s administration. steps back and releases quality bonds back to the market, 24

Credit – A film noir for optimists Gregory Venizelos Historically, a yield of 5.2% in Global IG is consistent with a Macro & Credit Strategist, return of 6% per annum (pa) over the subsequent five-year Macro Research – Core Investments period (Exhibit 25). This compares to an average of 4% pa over the history of the Global IG index. Key points Exhibit 25: At current levels of credit yields returns have been historically very attractive • Credit markets, especially investment-grade, have Global IG return pa over 5-year period to year x seen eye-watering drawdowns in 2022. Typically, 10 what tends to follow is a decent rebound in returns. ,% 8 2013 • Spreads have been resilient despite an extraordinary rsy 2004 5r 2014 2012 rise in interest rates, an inflation shock, and rising e6 2003 2005 ov 2020 2002 recession risks – reflecting healthy balance sheets. n 2016 2006 ur 2015 2010 2011 • Default expectations have risen, putting high yield ret4 2019 2021 2007 next 5yrs, valuations under pressure. In excess spread terms, al 2017 2018 2009 5.2%, 6.0% European credit screens cheaper than US credit. Annu2 2008 0 Deep drawdowns bring attractive entry points 1 2 3 4 5 6 7 8 Yield at start of 5yrs, % Source: ICE and AXA IM Research, 21 November 2022 The inexorable rise in interest rates which has accompanied, if not caused, the fall in risk assets in 2022 has made for some Global spreads not pricing recession eye-watering losses in credit returns. This has been very pronounced in investment grade (IG) due to its higher duration Credit spreads have inevitably widened in 2022 but have remained sensitivity compared to high yield (HY). Global IG was down by resilient in comparison to the extraordinary rise in interest rates, around 25% in late October (Exhibit 24), a drawdown nearly 1.5 the inflation shock and the rising risks of recession. It’s a tug of times worse than that during the global financial crisis. In war between resilient corporate balance sheet fundamentals contrast, high yield’s drop has been half that seen in that crisis. (contained spreads) and significant macro and policy headwinds (elevated refinancing costs, tight bank lending). The quarterly Exhibit 24: Return drawdowns in 2022 have been hefty; record- average spread in Global IG is currently 160bps, half the level that is breaking for investment grade historically associated with zero growth in global GDP (Exhibit 26). Credit market drawdowns This implies year-on-year GDP growth of 3% over the next quarter. 1995 2000 2005 2010 2015 2020 The one exception is euro IG, whose quarterly average spread 0% of 205bps implies a negative GDP of -0.4% at the start of 2023, consistent with the stronger macro headwinds facing Europe. -10% Exhibit 26: Global spreads have widened but not to levels that suggest significant recession risks -20% Global credit benchmark spread, bp Global IG bps bps -30% 500 Global IG [Lhs] 2500 Global HY Global HY [Rhs] 400 2000 -40% Source: ICE and AXA IM Research, 21 November 2022 300 1500 Historically, steep drawdowns have tended to be followed by a 200 1000 significant rebound over the subsequent 12 months – though 100 500 past performance does not guarantee future results. In Global IG, for example, the spread has widened by 60% to mid November 0 0 2022, from 100 basis points (bps) to 161bps. The yield, however, 1998 2001 2004 2007 2010 2013 2016 2019 2022 has nearly trebled from 1.85% to 5.2% over the same period. Source: ICE and AXA IM Research, 21 November 2022 25

Default outlook weaker but manageable Relative value favours European credit Default expectations for HY have evolved through 2022, from The severe energy shock in Europe on the back of Russia’s quite benign at the beginning, to somewhat worse than the invasion of Ukraine has brought about recession risks which have historical average currently. Most of the deterioration came been promptly reflected in the relative pricing of European credit through the summer, as yields and cross-asset risk premia rose premia compared to other geographies. Once we normalise yields notably. Key default predictors have deteriorated, such as bank for duration mismatch (the US benchmark is much longer than lending standards (green line, Exhibit 27). The same is true for the European one) and deduct currency hedging costs, euro credit predictors that comprise interest rate risk – the refinancing shows a significant yield pickup over dollar credit (Exhibit 29) – gap, the difference between average yield and average coupon near its historic highs in IG, at just under 2%, and at its highest of an index and price-based bond distress ratios (orange line, level since the Eurozone debt crisis in HY, at circa 3.5%. Exhibit 27). By contrast, spread-based bond distress ratios have remained reasonably well contained (blue line, Exhibit 27). Exhibit 29: Adjusted for duration and currency hedging costs, euro credit offers historically high yield pickup over dollar credit Exhibit 27: Default predictors have deteriorated, particularly Yield, FX adjusted & 4y duration equivalent those with interest rate risk like the price-based distress ratio 10 Typical default predictors for USD HY 8 EUR IG - USD IG 1.82 100% Distress ratio, spread > 1000bp EUR HY - USD HY 3.53 6 80 Distress ratio, price < 80c 4 60 Bank lending constraint 2 40 0 20 -2 0 -4 -20 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: Bloomberg, ICE and AXA IM Research, 21 November 2022 -40 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 To establish relative value in terms of credit risk in isolation Source: US Fed, ICE and AXA IM Research, 21 November 2022 (spreads rather than yields) and across markets, we can compare The deterioration of default predictors has pushed model- excess spreads, namely nominal spreads minus credit losses. forecast default rates higher, to levels that are above spread- Credit losses are due to defaults in HY and ‘fallen angels’ – implied defaults at current spread levels. This has made default companies downgraded from IG to HY. Default predictors inform valuations no longer cheap, across most HY credit cohorts. This us about default expectations over the next 12 months, while the direction in Purchasing Managers’ Indices indicate fallen is the case for the Moody’s HY cohorts for US and Europe angel expectations. Normalising excess spreads as a deviation (Exhibit 28) as well as the ICE benchmark for US dollar HY. The one exception is the ICE euro HY benchmark that still looks from their historic mean gives the relative value ‘pecking order’ cheap, in our view, by around 100bps. (Exhibit 30). US dollar HY appears rich while euro IG look cheapest, followed by sterling IG, euro HY and dollar IG. Exhibit 28: Default forecasts have risen, making valuations no longer cheap, across most high yield credit cohorts Exhibit 30: Excess spread across investment grade and high Moody's annual HY default rate spread yield flags the relative value in European over US credit implied 16% 8x Excess spread (4y dur equiv) abs Z-score US 1.5% defaults 14% Fwd estim USD IG 0.67 5 EU 2.2% now below 4 US fcast 4.8% forecasts 12% EUR IG 2.26 GBP IG 1.47 EU fcast 3.9% 10% USD HY -1.09 EUR HY 1.09 3 AXAIM fcast 8.1% 2 Sprd impld 8% 7x 1 5.6% 5.9% 6% 0 4.9% 4% -1 2% -2 0% 6x -3 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 -4 Source: Moody's, ICE, Fed, ECB and AXA IM Research, 21 nov 2022 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Fed, ECB, ICE and AXA IM Research, 21 November 2022 26

Equity – Rebound prospects amid headwinds Emmanuel Makonga more to inflation news than in the past, with large swings in the Investment Strategist, market following inflation data releases this year. Macro Research – Core Investments Exhibit 31: Inflation in the driver’s seat Global equity beta Key points 4.0 to economic surprise to inflation surprise 3.0 • Runaway inflation amplified by exogenous factors together with a dimming economic outlook have 2.0 been challenging for equity markets. 1.0 • The tightening of monetary conditions should continue to affect equity markets both in level and 0.0 direction terms. -1.0 • While equities tend to anticipate macroeconomic recovery in recessions, the potential for rebound -2.0 may be weaker in the lagged-stimulus environment 2008 2011 2014 2017 2020 Source: Citigroup and AXA IM Research, November 2022, 5y Rolling beta we expect in 2023. • The uncertainty around inflation prompted more hawkish Unexpected events rushed the process policy from central bankers, which led to a sell-off in bond markets. As a result, discount rates increased and led to a There is no doubt 2022 was a one-of-a-kind year – it marked mechanical decline in the value of equities. Thus, the de-rating the end of three consecutive years of positive returns for stock (-19.5%) has been the main reason for this year's market markets. At the time of writing, we are witnessing the worst correction, while earnings have held up rather well at +5.7% year-to-date performance (-13.8%) since the 2008 global (Exhibit 32). However, we do not expect this earnings’ financial crisis. This downturn can be explained by several resistance to continue next year. The consensus earnings-per- issues but two have captured our attention. First, the start of share growth expectations seem too optimistic given our the monetary tightening cycle, which fed the negative trend on outlook for next year's economic growth in developed markets the growth outlook. Second, the Russia-Ukraine war which had is at circa 0%, with recessions across Europe and the US. two major repercussions – one on sentiment, where the Therefore, we believe the market correction is not yet uncertainty brought by the war led investors to turn from risky complete, and the onset of further macroeconomic decline assets to safe havens, the other on inflation as Russia and could be the trigger for a deeper stock market decline. Ukraine are two major global suppliers of commodities. This high inflation regime coupled with the cost of monetary Exhibit 32: Resilient earnings helps to mitigate the fall tightening on economic growth has been harmful for stocks. Global equities: total return decomposition 60% Valuations 50% Earnings The only sector that has performed positively this year was 40% Dividends energy (+47.4%). Volatility in commodities helped inflate the 30% earnings of the industry's companies, which have been 20% 5.7% consistently revised upwards this year (+99.8%), keeping the 10% sector at attractive valuations throughout 2022. This 0% outperformance fuelled the rotation towards Value (-3.1%) -10% from Growth (-23.6%). The latter suffered from the rise in -20% interest rates due to its long duration bias. Finally, the -20.2% Defensives strategy (+3.2%) proved resilient, supported by -30% sustained revenues of healthcare and consumer staples. 2015 2016 2017 2018 2019 2020 2021 2022 Source: MSCI and AXA IM Research, November 2022 (YTD) Inflation has clearly been the major market mover this year Limited support in the financial condition outlook (Exhibit 31). The (negative) beta versus inflation surprises has risen consistently through the year and now stands at its In a classic liquidity cycle, fund allocations move from cash to historically lowest level. This shows how equities have reacted assets and vice versa. We are currently in a phase where asset 27

prices are falling, and risk premia are rising (Exhibit 33). Yet we Things may soon improve, but by less than usual have doubts on the way we will reach the next stage, namely central bank easing. If the consensus is on rates reaching With the idea that monetary conditions will remain ‘tighter for terminal levels by the first half of 2023, we think the risk is longer’, the behaviour of the equity risk premium (ERP) should policy being eased more slowly. Moreover, more attention be considered. Post the 2008 crisis, the lower interest rate should be paid to central bank balance sheet management. environment has resulted in a structurally higher ERP (+2.4% vs. Indeed, the liquidity provided by the plethora of pre-2008) and it currently hovers around 4% (Exhibit 35). These unconventional tools used by central banks post the 2008 crisis levels imply two things looking forward. The ERP has little is being reversed in increasing jurisdictions. Thus, quantitative upside potential as interest rates are expected to remain high, tightening will bring an additional layer to the already de facto so if one looks for a more appealing entry level, prospects for negative liquidity tightening for equities, thereby adding weight getting there are slim. Finally, the forward performance of to our ‘further downside’ narrative. equities is most likely to be below the post-2008 period. Exhibit 33: Not the best spot for assets Exhibit 35: Post financial crisis bonanza coming to an end Global rates and equity risk premium 8 7 6 Pre Great Financial Crisis %) (5 Post Great Financial Crisis P ER4 2022 la obGl3 2 1 0 0 2 4 6 8 10 Global Rates (%) Source: Absolute Strategy Research and AXA IM Research, November 2022 The pace of tightening in monetary conditions has had a Equity markets have tended to rebound at the bottom of a significant impact on sentiment, while the level of monetary recession, often aided by early signals of an upcoming improvement conditions is also important. In our baseline scenario where in liquidity (Exhibit 36). When this is priced in, the rebound inflation does not fall back to its target in 2023, we find it could be decent but milder than after the 2008 crisis. Thus, difficult to imagine central bankers reversing their hawkish given our macro scenario, a barbell positioning between stance. Under tight monetary conditions, next 12-month price- Defensives and Quality in the first half of 2023 and Cyclicals and to-earnings ratios tend to correct by -5.3% over three months Growth for the expected rebound in the second half appears on average (Exhibit 34). sensible. Exhibit 34: Do not overlook the level of policy restriction Exhibit 36: Stock markets tend to rebound ahead of the Global Equity - Quarterly returns and financial conditions recession trough Average S&P 500 path in recession since 1900 Market NTM PE ratio 6.1 Min/Max Range Performance 2.6 3.9 2.6 9.2% 0 -2.4 -5.7 -5.3% -2.8% 1.6% Easing Neutral Tightening Loose Medium Tight Momentum Level Source: MSCI, Chicago Federal Reserve and AXA IM, November 2022 Start 1/4th Mid 3/4th End Source: Robert Shiller and AXA IM Research, November 2022 28

Forecast summary Real GDP growth (%) 2022* 2023* 2024* AXA IM Consensus AXA IM Consensus AXA IM Consensus World 3.2 2.3 2.8 Advanced economies 2.5 0.1 1.0 US 1.9 1.7 -0.2 0.2 0.9 NA Euro area 3.2 3.0 -0.3 0.0 0.9 NA Germany 1.7 1.4 -0.6 -0.9 0.8 NA France 2.4 2.5 0.0 0.3 0.8 NA Italy 3.6 3.3 0.0 -0.1 0.6 NA Spain 4.5 4.4 0.3 1.2 1.3 NA Japan 1.6 1.5 1.7 1.5 1.3 NA UK 4.3 4.1 -0.7 -0.3 0.8 NA Switzerland 2.3 2.2 0.6 0.7 1.3 NA Canada 3.2 3.2 0.3 0.6 1.1 NA Emerging economies 3.6 3.5 3.8 Asia 4.1 4.8 4.5 China 3.0 3.2 5.0 4.8 4.8 NA South Korea 2.3 2.6 1.5 1.6 2.0 NA Rest of EM Asia 5.5 4.9 4.4 LatAm 3.5 1.7 2.4 Brazil 2.7 2.6 1.0 0.9 2.0 NA Mexico 2.2 2.1 1.0 1.2 2.0 NA EM Europe 0.5 -0.9 2.1 Russia -3.0 -3.8 2.0 Poland 4.4 4.1 0.1 1.1 2.4 NA Turkey 5.9 5.1 0.5 2.2 1.4 NA Other EMs 4.5 3.6 3.6 Source: Datastream, IMF and AXA IM Macro Research − As of 30 November 2022 CPI Inflation (%) 2022* 2023* 2024* AXA IM Consensus AXA IM Consensus AXA IM Consensus Advanced economies 7.5 5.0 2.7 US 8.2 8.0 5.1 3.9 3.4 NA Euro area 8.6 8.3 5.6 5.8 2.4 NA China 2.1 2.2 2.3 2.3 2.5 NA Japan 2.4 2.2 2.1 1.6 1.3 NA UK 9.1 8.9 7.6 6.4 2.8 NA Switzerland 2.8 3.0 2.0 2.3 1.3 NA Canada 6.8 6.8 4.3 3.5 2.4 NA Source: Datastream, IMF and AXA IM Macro Research − As of 30 November 2022 Central bank policy Meeting dates and expected changes (Rates in bp / QE in bn) Current Q4-22 Q1-23 Q2-23 Q3-23 Q4-23 Dates 1-2 Nov 3 1 -1 Jan/F e b 2 -3 May 2 5 -26 J ul 3 1 -1 Oct / N ov United States - Fed 3.25 13-14 Dec 2 1 -22 M a r 1 3 -14 J un 1 9 -20 S e p 1 2 -13 D e c Rates +1.25 (4.25-4.50) +0.5 (4.75-5.00) unch (5.00) unch (5.00) unch (5.00) Dates 15 Dec 2 Feb 4 M a y 2 7 J ul 2 6 Oct Euro area - ECB 1.50 16 Mar 1 5 J un 1 4 S e p 1 4 D e c Rates +0.5 (2.00) 0.5 (2.50) unch (2.50) unch (2.50) unch (2.50) Dates 19-20 Dec 17-18 Jan 2 7 -28 A pr 2 7 -28 J ul 3 0 -31 Oct Japan - BoJ -0.10 9-10 Mar 1 5 -16 J un 2 1 -22 S e p 1 8 -19 D e c Rates unch (-0.10) unch (-0.10) unch (-0.10) unch (-0.10) unch (-0.10) Dates 3 Nov 2 Fe b 1 1 M a y 3 A ug 2 N ov UK - BoE 2.25 15 Dec 23 Mar 2 2 J un 2 1 S e p 1 4 D e c Rates +1.25 (3.50) +0.75 (4.25) unch (4.25) unch (4.25) -0.25 (4.00) Source: AXA IM Macro Research - As of 30 November 2022 29

Calendar of events 2022 Dates Events Comments Dec China Central Economic Work Conference 6 Dec US: Run-off Senate election in Georgia Dem’s hold Senate maj 13-14 Dec FOMC Meeting +50bps (4.25-4.50%) 15 Dec ECB Meeting +50bps (DFR = 2%); comments on QT 15 Dec BoE Meeting +50bp (3.50%) 15-16 Dec EU Summit 16 Dec US: Continuing Resolution to avoid government shutdown ends Extension likely 19-20 Dec BoJ Meeting Unchanged (-0.1%) 2023 Dates Events Comments January Q1 2023 China Second Plenary Session of the 20th CPC Congress 17-18 Jan BoJ Meeting 1 Feb FOMC Meeting +0.25% (4.50%-4.75%) February 2 Feb BoE Meeting +50bps (4.00%) 2 Feb ECB Meeting +25bps (DFR= 2.25%) 25 Feb Nigeria general elections March National People’s Congress 16 Mar ECB Meeting +25bps (DFR=2.5%) March 21-22 Mar FOMC Meeting +0.25% (4.75%-5.00%) 23 Mar BoE Meeting +25bps (4.25%) 23-24 Mar EU Summit 2 April Finland election (National Parliament) April 8 April BoJ Governor Kuroda’s term ends 13 April Northern Ireland Assembly elections latest date if executive not formed 4 May ECB Meeting Unchanged (2.5%) 4 May UK local elections May 7 May Thailand general elections 11 May BoE Meeting Unchanged (4.25%) 14 May Germany (Federal state elections) 28 May Spain Regional elections 13-14 June FOMC Meeting June 15 June ECB Meeting Unchanged (2.5%) 18 June Turkey presidential and parliamentary elections 29-30 June EU Summit July July Greece elections (National Parliament) September Autumn 23 Poland presidential elections October 29 Oct Argentina general elections December Spain (National Parliament) 2024 Dates Events Comments January Jan US Primaries begin April 10 April South Korean legislative elections May 1 May India general elections 11 May US Presidential elections June 2 June Mexico general elections July UK general elections 30

Abbreviation glossary 1Q23 first quarter of 2023 IMF International Monetary Fund 1H23 first half of 2023 ISM Institute of Supply Management [Lhs] left hand scale (graph) JGB Japanese Government Bonds [Rhs] right hand scale (graph) JPY/¥ Yen a.r. annualised rate LatAm Latin America APP Asset Purchase Programme LBO Leveraged buy-out AUD Australian dollar LTRO Long Term Refinancing Operation BAML Bank of America Merrill Lynch MBS Mortgage-backed security BEA US Bureau of Economic Analysis mom month on month BIS Bank for International Settlements MPC Monetary Policy Committee bn billion MRO Main Refinancing Operation BLS Bureau of Labor Statistics n.s/a non-seasonally adjusted BoC Bank of Canada NBER National Bureau of Economic Research BoE Bank of England NPL non-performing loans BofA Bank of America NFIB National Federation of Independent Business BoJ Bank of Japan NOK Norwegian krone bp(s) basis point(s) OECD Organisation for Economic Cooperation and CAD Canadian dollar Development CANSIM Canadian Socio-Economic Information Management System OMT Outright Monetary Transactions CEE Central and Eastern Europe ONS Office for National Statistics CEEMEA Central and Eastern Europe/Middle East/Africa P/B price-to-book ratio CHF Swiss franc P/E price/earnings CPI Consumer price index PBoC People Bank of China DFR Deposit facility rate PCE personal consumption expenses DM Developed market PEG price/earnings to growth EBA European Banking Authority PEPP pandemic emergency purchase programme EC European Commission PMI Purchasing Manager Index ECB European Central Bank pp percentage point EM(s) Emerging market(s) PPI Producer price index EMU European Monetary Union PPP purchasing power parity EPS Earnings per share QE Quantitative easing ERP Equity risk premium QE3 Third quantitative easing ESM European Stability Mechanism QQE Quantitative and qualitative easing ETF Exchange-Traded fund qoq quarter on quarter EU European Union REER Real Effective Exchange Rate EUR/€ Euro RMB renminbi chinois (yuan) Fed US Federal Reserve RRR Required rate of return FFR Fed fund rate s/a seasonally adjusted FOMC Federal Open Market Committee SEK Swedish krona FTA Free Trade Agreement SMEs Small and medium size enterprises FRB Federal Reserve Bank SMP Securities Markets Programme FY Fiscal Year SWF Sovereign Wealth fund GBP/£ Pound Sterling TFP total factor productivity GDP Gross Domestic Product TLTRO Targeted Longer Term Refinancing Operation GFC Global Financial Crisis tn trillion HKD Hong Kong dollar UN United Nations HY High Yield USD/$ US dollar ICE InterContinental Exchange VAT value-added tax IG Investment Grade yoy year on year IIF Institute of International Finance ytd year to date INSEE French National Institute of Statistics and Economic WTO World Trade Organisation Studies 31

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