First Quarter 2023
More clarity and opportunities in 2023
After a year of many deep uncertainties, we think 2023 is starting to become clearer. The economic outlook is likely to remain challenging for another quarter or two, but we expect that, by the second half of 2023, inflation should moderate and economic growth should start to pick up again. While 2022 was a year where almost all asset classes performed poorly, we think that 2023 is likely to offer several investment opportunities.
A moderation in inflation should open the door for fixed income investments in the first half of 2023. As such, we start the year overweight fixed income. We think this is more of a win-win situation at the start of the year given that current yields are high, and inflation is moderating. If the global economy is able to avoid a significant downturn and we see continued growth, then fixed income should at least be able to offer returns in the form of high yields. If, on the other hand, the global economy slips into recession, then fixed income will benefit from the lower inflation and interest rates that tend to accompany a recession.
On the other hand, slowing economic growth in early 2023 will likely be a headwind to equity investments. We think it is possible that growth could halt altogether and turn into a classic recession, but it is also plausible that the slowdown is a modest one. In either case, we think growth assets like equities will not be able to recover until that growth slowdown has troughed later in 2023. We therefore have a neutral outlook on equities, commodities and alternatives at the start of the year and we are underweight cash.
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