Outlook 2023: Opportunity in a volatile world

December 09, 2022 11:04
Photo: Reuters

The year 2023 is likely to have its share of economic turbulence, but from an asset price perspective it should be materially better than 2022. Events over the last 12 months have heightened our conviction that the underlying dynamics at play in the global economy have changed in profound ways and that the relationships, behaviours and outcomes that have guided investors since the 1990s no longer apply.

The key point here is that the rate of growth in the supply side of the global economy has downshifted. It has downshifted because globalisation is slowing or reversing, because demographics are now deteriorating rapidly, and because changes in political-economy preferences have caused productivity growth to slow across the developed world. Supply pressures should continue to ease in the near term and inflation is likely to moderate. But from a long-term perspective, growth in the supply side of the global economy has slowed down, which means the next economic cycle will be characterised by higher interest rates, greater underlying inflationary pressure, more stop-start gross domestic product (GDP) growth, and less countercyclical policy support for economies and asset prices.

With inflation eroding real incomes and interest rates rising sharply, recessions are likely in early 2023. But the US, UK, and European economies should all be recovering in the second half of the year. With China likely to accelerate steadily through the year as policy easing steps up a gear, the global economic landscape should be much improved towards the end of 2023.

The global energy crisis has brought concerns about energy security and cost to the fore for consumers, businesses and governments alike. A renewables-based energy system is likely to be both more secure and cheaper than a fossil fuels-based system, so recent developments should ultimately accelerate the transition to a low-carbon energy system.

For 2023, we are most positive on infrastructure, fixed income, and agriculture. All three asset classes offer yield and defensiveness, while infrastructure and agriculture also provide a hedge against high inflation. Global listed equities and real estate face more headwinds in the near term, but there are still thematic opportunities in both asset classes, and cyclical opportunities should emerge in early 2023 as the downturns unfold and then morph into recoveries.

Debt Markets: Yield is back in global debt markets and with central bank tightening expectations starting to peak, this creates an array of attractive risk-adjusted return opportunities. Developed market sovereigns in particular offer attractive entry points and strong protection levels. Credit fundamentals in both investment grade and high yield markets are currently strong. Defensive positioning is warranted though, in our view, given the potential for recessions and inflation to undermine this strong starting point. We are more cautious on emerging markets debt, where underlying fundamentals are more mixed and likely to be stressed further in 2023.

Equity Markets: The derating sell-off is mostly behind us, in our view. But earnings could now come under pressure as revenue growth slows in line with the deterioration in global growth in the first half of 2023. US large-caps have been remarkably good performers in recent times, while as globalisation slows and onshoring becomes a major theme we think construction and engineering firms, railroads, and consumer discretionary-related companies will benefit.

Real Assets: Infrastructure is a standout. It offers inflation protection, defensiveness, high yield, and exposure to structural growth drivers, all of which should be attractive to investors in 2023. Agriculture, with its inflation hedge characteristics and consistent return delivery, also looks attractive to us. The rise in interest rates globally means the near-term outlook for real estate is more challenging. High-quality buildings with healthy cash flows and premium tenants, and assets in attractive locations where there are demand-supply imbalances, should continue to perform solidly.

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Head of Thought Leadership, Macquarie Asset Management