Citi Global Wealth reGioNAL ASSeT CLASS PreviewS | | 89 Investments Overview creates risks of confrontation with the EU over As the global economy slows markedly in 2023, sovereignty-related issues. corporate revenues could come under pressure. Real GDP growth in the eurozone may fall 0.5% With various input costs including wages in 2023 after rising 3.2% in 2022. In the UK, Fiscal policy in 2023 is set to tighten, as set to increase further next year, operating we see a 1.0% drop in 2023 after a rise of 4.3% governments seek to shrink their budget margins are expected to narrow during the in 2022. Consumer spending should weaken deficits. However, the EU is unlikely to first half of 2023. This will likely translate into in coming quarters as household confidence reintroduce strict fiscal rules – suspended during lower expectations for corporate earnings per declines given high levels of inflation and the the pandemic – before 2024. The European share (EPS). ‘cost of living’ crisis. Elevated uncertainty and Central Bank (ECB) and others will probably the central bank-driven rapid tightening in tighten monetary policy further. But as inflation Bottom-up analyst consensus forecasts are financing conditions will likely induce firms to begins falling back from multi-decade highs, for European ex-UK EPS to grow 2.1% in 2023 trim hiring and investment in early 2023. A we expect policy rates to peak amid weakening after rising 15.8% in 2022. UK EPS are seen short-lived recession lasting between three or domestic demand. contracting 2.8% in 2023 after rising 36.8% four quarters is our baseline scenario for 2023. in 2022. We believe these expectations are Equities too optimistic, with further downgrades likely Some European countries could be at risk of in the coming quarters. Relative and absolute power shortages this winter as natural gas valuations remain cheap for 2023, with Europe storage facilities are not evenly distributed. Our favored European markets ex-UK on 12.7% forecast earnings and the UK Geopolitical risk is a clear and present danger on 9.6%. until the war in Ukraine ends. As a large exporter 1 SECTORS EPS GROWTH FORECAST In this challenging environment, we prefer firms of goods and services, Europe will be impacted with strong management, robust balance sheets, by the expected slowdown in global economic Consumer staples 9.3% plentiful cash flow and resilient earnings and activity, even if recent currency depreciation dividends. We favor defensive sectors such as against the dollar cushions the blow. Healthcare 7.8% healthcare and consumer staples, while being While no major elections are due in 2023, less constructive on energy and industrials. politics could pose a significant risk. The UK is Sources: 1 - FactSet consensus estimates, as of 23 Nov We continue to see upside potential for green struggling with the barriers that it now faces 2022; 2 - Bloomberg, as of 23 Nov 2022. Past perfor- energy and infrastructure going into 2023, given mance is no guarantee of future returns. Real results Europe’s need to diversify its energy mix away when trading with the European Union since may vary. Indices are unmanaged. An investor cannot Brexit. It is also suffering from temporarily invest directly in an index. All forecasts are expres- from Russian natural gas dependency. stressed public finances. It is not clear whether sions of opinion, are subject to change without notice and are not intended to be a guarantee of Persistently high inflation in early 2023 and the new prime minister (PM) Rishi Sunak future events. can establish a more constructive trading tighter central bank policies will likely challenge relationship with the EU. Europe ex-UK equities have been under pressure equities. By the second half, however, we expect amid the Russia-Ukraine war, gas supply issues, European and UK equities will likely be looking France and Germany – the EU’s foremost tighter financial conditions and higher-than- ahead to an early-stage economic recovery. powers – seem to disagree on many important expected inflation. UK equities have done much Key risks to our view are still skewed to the issues such as energy and defense. In Italy, better, thanks to higher weightings in stronger downside, ranging from a deeper recession, new PM Georgia Meloni leads a fractious far- performing sectors such as energy, healthcare higher inflation for longer, gas supply issues and right-led coalition. Her administration is keen and financials. For 2023/24, we remain delayed Chinese recovery. to receive cash from the NextGenEU COVID underweight Europe ex-UK equities and neutral Recovery Fund. However, her euro-skepticism on UK equities.