2023: An investor rebalancing act

• Global growth looks set to keep slowing into 2023 as more areas, especially the eurozone and UK, enter a recession. However, any downturn is likely to be mild. 
• As economic conditions worsen, central banks will need to balance tighter monetary policy, in the fight against inflation, against the potential hits to growth. As policymakers grapple with how quickly to respond to the changing data, policy mistakes could follow.
• As interest rates speed higher, investors are returning to a world where bonds offer more value and become interesting again. Meanwhile, equities may struggle in the short term, with earnings results crucial to sentiment. One thing is clear — heightened volatility is not going away soon. 
• Investors should beware being too pessimistic. A selective approach to investing and adhering to a long-term and diversified strategy, could help navigate any uncertainties.  
• Performance prospects are more encouraging over the medium term. Indeed, following the sell-off seen in equities and bonds in 2022, potential long-term opportunities of twelve months ago, appear more appealing now. 

After the last twelve months, roll-on 2023. The year has seen traditional portfolios, made solely of stocks and bonds, have one of their worst calendar years in a century, according to Bloomberg. The culprits? Rapid hikes in interest rates by the US Federal Reserve, eye-watering levels of inflation, and many economies in, or close to, recession.

A sunnier medium-term outlook

The Barclays Private Bank Investment Strategy Team remains “uncomfortably constructive” despite the short-term squalls. Central bankers face a tough task getting the right balance between too much and not enough policy tightening. Meanwhile, with governments more strapped for cash, launching stimulus measures will be more difficult as funding costs rise.

As global growth decelerates, the question is where, and when, recession strikes. Both Europe and the UK appear close to a recession, if not arguably there already. The outlook seems rosier in the US, given that it may barely grow in 2023. After one of the worst years in decades for the Chinese economy, its decision over whether to lift its zero-COVID policy, finally, will be key to the health of the second largest global economy next year. 

After many months of being buffeted by soaring inflation and weaker growth, and supportive base effects, inflation should finally moderate in 2023. The speed of the deceleration is uncertain, though may be decided by the pace of the economic slowdown, assuming that geopolitics don’t interfere. 

More volatile financial markets

Given the high degree of uncertainty over the outlook for inflation, the economy, and monetary policy, more spikes in volatility appear to be on the cards, as investors are wrong-footed by events. As with the experience, and surprises, of the last twelve months, appropriate diversification and keeping to long-term objectives remain essential. 

Are bonds back in business?

After years of hunting for yield in public and private markets during a low-rate era, the surge in interest rates this year means that it may be time for investors to revisit their bond exposure. While yield opportunities still exist in real assets and private markets, the repricing in debt markets means that the risk-free rate is finally back, and so attractive income can potentially be obtained again in bond markets.

Can equities bounce?

Like bonds, equity valuations have sold off in 2022. Markets are likely to stay choppy until more clarity emerges, especially on the earnings front. After years of investors fearing missing out on equity returns, bonds are now a credible alternative in portfolios. 

Despite the renaissance in bond yields, equities appear to offer more potential upside than bonds. That said, a sustained bounce in equities still looks some time off given the uncertainty on economic growth, company earnings, inflation, and interest rates. As such, another mixed year for equity investors seems to be on the cards.

Energy transition

The after-effects of Moscow’s invasion of Ukraine and unreliability of their fossil fuel supplies this year, highlighted why energy security matters. Much of the focus on this security has focused on oil and gas. But, whatever the long-term effects of higher power prices, energy transition to a low-carbon world looks like accelerating, presenting investors with many opportunities.

Keeping an eye on the long term

After a year of political upheavals, rampant retail price rises, and squeezed real incomes, it is easy to be gloomy. While the short term will probably be tough, the sell-off seen in equities and bonds in 2022 means that potential long-term opportunities of twelve months ago, probably seem even more appealing now.