Amidst soaring inflation rates, Fahad Kamal, chief investment officer, and Thomas Gehlen, senior market strategist at private bank Kleinwort Hambros, discuss the global outlook for 2023, where they expect to see growth and where investors should put their money in an unprecedented environment.

With the outlook in 2023 remaining uncertain, and fears of a global recession on the horizon, Thomas Gehlen at Kleinwort Hambros highlighted the benefits of investing in real assets at a webinar this week. 

Speaking at the event, Gehlen said: “We have taken a very prudent approach, with a maximum amount of diversification. We are slightly underweight in equities. We hold a lot of diversifiers.” 

“The firm has just started investing in real assets, which we shied away from in the past, due to the challenges. But it brings a number of benefits: it provides a yield, diversification and a degree inflation protection,” he added.

“We have starting building exposure in infrastructure, for example, electricity grids, bridges, supermarket property and undersea internet cables,” Gehlen continued. 

“We are also investing in gold, hedge funds, which offer portfolio diversification, and hold a lot of cash, and a tad of government bonds which haven’t done very well” he said. 

We do favour UK equities too, he added, which have benefited from energy exposure from cheap sterling. 

“[For] 15 years, bonds were an important diversifier. But it has been the worst year for bonds since 1929, and we are underweight in them,” Gehlen said. 

Kamal highlighted how the US bond market is predicting a recession, as the 10-year yield is much lower than the two-year yield, even though inflation has peaked in the US, there’s a tight labour market, robust economy and no recession right now.  

He said that whatever the Fed is doing to slow down the economy, it is working, he said: “The long-term inflation expectations have come down considerably and the US has secured its mandate to anchor long-term inflation expectations."

“They have done a good job, even if it causes a short-term recession, otherwise we will end up in a 70s' type situation,” Kamal added.

But they do not see inflation coming down to 2 per cent anytime soon.

“Sterling has meanwhile rebounded off its lows, which has been causing problems for the UK and the rest of Europe. Our view is it won’t go a lot further,” he continued.
 
He also highlighted how emerging markets have held up better than expected against the strong dollar, due to a sensible monetary policy.

Nevertheless, a strong dollar could cause serious problems for a lot of firms. Although the central banks are not yet considering coordinated action to weaken the dollar and to strengthen other currencies, that might change, Kamal said. 

However, he believes that the worst is probably over for sterling – partly reflected in the firm’s portfolio, which has been very dollar heavy towards being more exposed to UK assets.