|John Husselbee(pictured), of the Liontrust Multi-Asset Team, reflects on 2022 and looks ahead as he shares his views on what markets might have in store to challenge multi-asset investors in 2023. |
Much of 2022 has been marred by a relentless stream of bad news. Global financial markets can still deliver positive returns in 2023 without good news, as shown in October and November. But the bad news must cease if they are to progress.
Inflation and how far central banks would raise interest rates to tackle it has been the key question for markets this year. Central banks continue to walk a tightrope between doing too much or too little monetary tightening. But we anticipate inflation will edge down in 2023 as the rolling base effects from Covid shutdowns, changes in consumer behaviour and the recent energy price shocks work through the system. This will enable central banks to ease off on rate hikes.
While a slowdown in economic activity in 2023 is a broad worry, we believe that the global economy remains on a solid footing and the recession will be a ‘small r’ one rather than a protracted event.
Market prices have reset substantially in 2022, most notably in fixed income markets with government bond yields moving up from their rock bottom levels. Yields available on both government and corporate debt are significantly more rewarding than they have been in recent years. In particular, high yield bonds now offer very attractive spreads versus government bonds that will provide a buffer against inflation and the risk of companies defaulting on their debts in an economic slowdown.
Equity markets look attractively valued now too following their sell-offs this year. We expect to see many assets reverting to performances that are more in line with longer-term trends and fundamentals. It would be unwise to assume that US tech growth stocks’ astounding outperformance over the last decade will persist indefinitely. Value has already recovered some ground, mainly in energy stocks, but there is still further to go. Emerging market and small cap equities will also be geared into any economic recovery in 2023.
As we approach the end of 2023, financial markets are at an important junction. Major developed market central banks have paused their rate rises and there is considerable uncertainty about what happens next. As inflation has come down meaningfully in the past 12...