2023 Outlook: Key takeaways

Following a turbulent 2022, investors may face new problems and possibilities in 2023. Read what our Global Market Strategists predict for the coming year.

Inflation is strong, but officials will likely pause rate hikes as economic growth and inflation drop.

In 2023, core bonds and stock sectors such as health care, technology, and industrials could outperform or provide investors with cover.

There has never been a better opportunity for investors to examine a well-balanced portfolio of equities and bonds.

The Russian-Ukrainian War, record-high inflation, and rising global interest rates marked 2022, wreaking havoc on investor portfolios. What began as a great year for global markets has turned into a rout.

Nonetheless, while 2022 is shaping up to be one of the worst years for a well-diversified portfolio, there is opportunity among the ashes. Stocks have been beaten, valuations have fallen, and bond yields are increasing, providing an appealing entry point for investors wanting a classic stock and bond portfolio.

That’s not to say there aren’t plenty of “what-ifs?” to contemplate. Will inflation fall sufficiently for the Fed to become more dovish? Is a worldwide recession on the way? What could possibly go wrong?

Market Strategists examine how tightening monetary policy and global economic downturn would likely effect financial markets in this year’s outlook report. Conditions may appear dire at the moment, but our strategists believe that 2023 will give a compelling chance to invest in a well-diversified portfolio of stocks and bonds.

USA highlights

Inflation has been at an all-time high for months, but our experts believe it will return to more manageable levels in 2023.

While a fall in inflation is welcome, it is unlikely to persuade the Federal Reserve to lower interest rates in the near future. Our experts anticipate the Fed and other central banks around the world will keep interest rates high for the majority of 2023, but that the cycle of rate hikes will halt sometime next year.

For some time, there has been talk of a recession, which would send bonds and equities down 15% to 25% by 2022. Our experts feel that the markets have already priced in a significant amount of recessionary risk at current levels.

Along with core bonds, health care, technology, and industrial equities may give investors considerable protection from a 2023 economic crisis.

Global highlights

High oil prices, inflation, and input costs will very certainly force the European Central Bank to remain hawkish longer than the United States Federal Reserve in 2023.
This winter, Europe’s reliance on Russia for energy poses a serious risk to the economy. Policymakers have increased natural gas storage levels, but if the winter is especially cold, these efforts may be insufficient.

Global economic activity may also be hampered by a strong US dollar. Most financial transactions and commerce are denominated in dollars, which raises the cost of doing business for non-US enterprises.
Latin America has benefited from increased oil prices throughout 2022, but with the region’s GDP expected to rise just 1.6% next year, down from 3% in 2022, our strategists believe the region will not be immune to global downturn.

Risks

Aside from rising interest rates and inflation, the global economy faces other dangers in 2023 that our strategists are watching.

Financial insecurity

The Bank of Japan and the Bank of England were obliged to interfere in their respective currency markets to prevent turmoil in the fourth quarter of 2022. A dramatic drop in the yen in Japan eventually necessitated action. To secure the country’s bond market and pension system in England, the central bank was forced to intervene.

The implied volatility of the financial market — a measure of overall financial stability — is currently elevated, with the majority of the worry located outside the United States.

It’s worth remembering that financial systems all around the world are internationally linked, making them subject to instability that occurs beyond their boundaries.

Our experts predict that increased financial instability is unlikely in 2023, but investors should prepare their portfolios for it nevertheless.
China’s growth rate is slowing.

The collapse of the property industry and tight COVID-19 restrictions have stifled China’s economy. These themes are anticipated to persist until 2023.

Policymakers in China are diverting investment funds toward infrastructure development. Building sales and new construction growth are expected to continue to fall in 2023.
China is concentrating on economic stability rather than stimulus, and this is expected to continue in the coming year.

To summarize, brace yourself for a rocky trip in 2023, one that will provide possibilities to seek a well-balanced portfolio. Our strategists are aware of the dangers, but they aren’t hesitant to take them. You, too, should not be.