Investment Outlook 2023

As rate rises tail off and recession looms, we believe core government bonds will come into their own again, moving less in tandem with equities. While the drop in earnings expectations shows that equities may still face a tougher patch, the rise in yields has already increased the attractiveness of government bonds in core markets. 

A period of offshoring by western firms when globalisation was at its height has given way to one of re-shoring or friendshoring as de-globalisation gains hold. Countries’ scramble to source energy supplies in increasingly uncertain times allows us to be positive on commodities and commodity-linked themes. 

Countries where mortgage debt is mainly at variable ratesor is frequently re-set are particularly vulnerable to the fallout from a property downturn. As financial conditions tighten, companies exposed to short-term floating interest rates are looking more challenged than those holding long-term debt at fixed rates. 

With the rise in interest rates, higher volatility and significant political and economic uncertainties, we see investors demanding higher risk premia across all asset classes. We think the convergence of risk premia will continue to progressively shake up the opportunity set inside equities themselves, with valuation extremes converging.

The era of free money and of ‘quantitative easing’ is now over, seen in the rapid disappearance of negative interest rates throughout most developed countries. The tightening of financial conditions and the general upsurge in bond-market  volatility mean fixed-income investors need to pay more  attention than ever to credit quality. 

We view private assets as more essential than ever for alpha generation, portfolio volatility reduction and long-term diversification. The drop in valuations could mean that 2023 and 2024 are good vintages (year of initial PE investments) for funds with investment horizons of five to seven years. The same is true of private real estate.

As the world continues to grapple with severe political and geopolitical tensions, high and persistent inflation and other unknowns, we expect market volatility to remain elevated. But volatility also provides opportunities, offering the chance to deploy derivatives to monetise high volatility and mitigate portfolio risk.