Shifting Markets

Shifting Markets



As one cycle ends, another begins

How our worldview is changing 

With inflation declining and central bank interest rates reaching their peak part way through 2023, high quality fixed income becomes attractive. Emerging market equities, helped by a relaxation on Covid restrictions by China, are also strong portfolio diversifiers alongside high-dividend, low volatility US equities.

The global economy: peaks, pivots, and pickups 

We expect the current cycle of weak growth and rate hikes to continue through the first three months of 2023 and into the second quarter. A new cycle should then start, which we believe will be characterised by three major shifts.

The pace of global economic growth is likely to decelerate further in early 2023, but then begin to recover later in the year.

We expect euro area and UK economic activity to be under more pressure than in the US and China.

Inflation peaks then moderates

Inflation begins to ease, first in the US and then in the euro area and UK. However, it is likely to remain above pre-Covid levels.

Central banks stop hiking

The US Federal Reserve announces that it is no longer increasing interest rates, followed by the European Central Bank and Bank of England. But we don't expect rate cuts in 2023.

China’s economy picks up

The government relaxes its zero-Covid policies and stimulates the economy with additional measures. From a low point, growth rebounds moderately.
Within our equity allocation, we reshuffle our exposure out of quality growth and into high-dividend & low-volatility equities.

Fixed income attractive, adding equity diversifiers, slightly weaker US dollar
High-quality bond markets finally look set to do what they’re supposed to: provide a source of diversification in multi-asset portfolios. They’re not just about other sources of return, but also about protection against falls in equity markets, especially government bonds. As the end of the interest rate hiking cycle approaches, bond yields should fall (meaning prices would rise).

We don’t think it’s time to re-risk portfolios so keep our equity position marginally underweight. Alongside an increased bond exposure, this should mitigate downside risks if equity markets sell off. Within our equity allocation, we reshuffle our exposure out of quality growth and into high-dividend & low-volatility equities.
Here’s a summary of our investment views for the year ahead:

  • We believe US and emerging markets will outperform euro area equities, which we believe are over-valued given the likelihood of recession.

  • Equities that pay relatively high dividends and display low volatility are also attractive diversifiers.

  • High-quality bonds look increasingly attractive as interest rates peak, the pace of economic growth slows, and inflation falls back.

  • We believe low-quality bonds will come under pressure, especially those where spreads (the difference in yield compared to government bonds) look too tight.

  • The US dollar is likely to stabilise then weaken against other major global currencies.


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Information correct as at 10 January 2023.

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