Investment in a Minute - Navigating 2023 if Consensus is Correct

Biggest learning/takeaway from last quarter

The king is dead. Long live the king. For the period 1st January – 12th October 2022, a 60/40 portfolio of the MSCI ACWI and Bloomberg Global Aggregate lost -24.5%. Since then (through January 16th), the same portfolio is up +13.4%. The ‘death of 60/40’ debate will surely rumble on.

Irrespective, 2022 as a whole, reminded us of two time honoured lessons. First, markets can (and will often) humble even the best forecasts. Second, the flexibility to identify out of consensus opportunities can be invaluable in driving genuine diversification.

What should investors been mindful of in such an environment?

2023 consensus appears to be for global inflation to fall into line, enabling central banks to ease off hiking cycles; and a global GDP recession, albeit mild, with a recovery in H2. Indeed, bulls would point to three consecutive U.S. CPI data points that both declined and were below expectations; a tempering of wage growth concerns despite continued labour market strength; European natural gas prices that have fallen to pre-invasion levels; and a growing China re-opening narrative as reasons to be bullish.

However, as ever, the key question remains ‘what’s already in the price?’.  Equities have proven very willing to rally on hope of better economic outcomes. MSCI ACWI is up +16% from its lows, the EuroStoxx 50 +27% and the Hang Seng +48%. In rates, the US 10y treasury yield has rallied from 4.2% to 3.5% and the 30y one from 4.4% to 3.7%.

Such moves suggest to us that the behavioural episodes that were evident in October’s prices have now largely reversed. Outcomes that were largely out of consensus, e.g. China reopening, have now become mainstream bull calls. Markets can go higher (and government yields lower) but they will probably need the economic data, corporate earnings and policy makers to deliver. Risks and returns now appear relatively symmetric.

Most attractive markets

Across our multi-asset strategies, we continue to value flexibility and the ability to respond to market opportunities and remain patient in waiting for volatility to reveal behavioural episodes.

Equity valuations remain heavily contingent on how the earnings picture unfolds in the coming quarters. We continue to prefer those markets with greater valuation support in Asia and select European markets.

U.S. yields are less attractive than they were at their nadir in October but, nevertheless, we believe they have the potential to offer a safe haven asset in the event of a hard landing.

For income generating strategies, emerging market local currency bonds look attractive versus a U.S. dollar cycle that may have peaked in September 2022.