Navigating the polycrisis – Fidelity International 2023 outlook

by | Nov 17, 2022

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This year we have witnessed a confluence of shocks. The impact of the events that have unfolded this year will be felt long into the next one, particularly the tragic consequences of the Ukraine war. From a financial perspective, a chief change has been the shift in monetary regime, from one supportive of global markets to one with a focus on taming inflation.

With ongoing volatility and increasingly tight liquidity conditions, Andrew McCaffery, Global CIO, Fidelity International, highlights the trends expected to dominate the markets as we enter 2023.

To read Fidelity International’s full 2023 investment outlook, please click here.


Inflation vs. interest rates

“Inflation has dogged markets this year and is likely to remain high, bringing an end to the era of easy money and increasing the risk that overtightening by central banks will trigger a sharp recession, an “inflation bust.

“Markets want to believe that central banks will blink and change direction, negotiating the economy towards a soft landing. But in our view, a hard landing remains the most likely outcome in 2023. The previous norm of central bank “whatever it takes” intervention during the financial crisis and the pandemic is going or has gone.


“Until markets absorb this fully, we could see sharp rallies on the back of expected action by the Fed, only for them to reverse when it doesn’t materialise in the way they expect.

“Rates should eventually plateau, but if inflation remains sticky above two per cent, they are unlikely to reduce quickly.

Dollar strength


“A key factor to watch is where the dollar goes from here. In 2022, the strong dollar has proved to be a wrecking ball for other economies, both in the developed world and for emerging countries that rely on hard currency debt. If the Fed continues to raise rates, an even stronger dollar could accelerate the onset of recession elsewhere. Conversely, a marked change in the dollar’s direction could bring broad relief and increase overall liquidity across challenged economies.

Geographical diversification

“Other parts of the world are on different trajectories. Japan has so far maintained looser policy settings; but any shift away from its current yield curve control could lead to unintended consequences for the yen and potentially add another layer of risk to the already elevated levels of volatility in FX markets.


“China too has taken a different pathway in 2022, thanks to its zero-Covid policy and the reining in of its property market. In the next 12 months, we expect policymakers to continue to focus on reviving the economy, investing in longer-term areas such as green technologies and infrastructure. Any loosening of Covid restrictions will cause consumption to pick up. The deglobalisation that has arisen from the pandemic and tensions with the US will take time to work its way through but is a theme that will grow.

“Emerging markets and Asian countries, with a weaker growth correlation with the US and Europe, present one way to increase diversification, while cash and quality investment grade securities offer defensive characteristics.

Idiosyncratic elements


“As the dispersion of returns increases, investors will be able to seek out idiosyncratic elements in their portfolios rather than rely on whole market moves to generate returns. Opportunities should also begin to emerge among securities driven by longer-term themes such as decarbonisation and reindustrialisation, which could draw investor attention sooner rather than later,” McCaffery says.

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