2022 has been a heck of a year – a series of cascading crises ranging from Russia’s invasion of the Ukraine to a global energy shock exacerbated by Covid lockdowns in China & supply chain woes leading to an unprecedented Fed tightening cycle and a historically bad year for a 60-40 portfolio.
That’s now in the past - the question today is what about the future- what about 2023? While this monthly didn’t set out to be a 2023 outlook piece that’s what it has become. The full piece runs close to 6k words with 24 charts/tables from 16 different research providers. Enjoy!
The consensus is that 2022’s negatives will drag into next year with some calling for Armageddon. We see it differently. Our takeaway is that 2023 has the potential to surprise to the upside – to be a year of gradual stability as the crises ebb and the environment calms leading to declining volatility and the consequent ability to identify cross asset investment opportunities.
Think of it this way. EU Nat gas prices can pick up again but they won’t triple or quadruple as they did this year (currently at Russian invasion levels and falling). The Fed & ECB may raise rates next year but they won’t raise them as far & as fast as this year. China may continue its Zero Covid approach but with 2 week lockdowns a la Chengdu not 2 months as in Shanghai.
Market are forward looking and have discounted 2022 with rates, stocks and currencies priced for a 5% FF terminal rate. The silver lining in this year’s drawdown is that forward looking returns are the best they have been in years according to both GMO & JPMorgan.
We see 2023 as a reset year – a reset on the low growth, low inflation, low rate world that followed the GFC & a reset on the high multiple, high growth, US based equity leadership that came with it.
Our outlook is for a more stable 2023 – a year of transition to a high nominal growth world led by public – private spending to deal with the 3Cs of Covid, Climate & Conflict. As the crises fade so will the correlation of one leading investors to assess opportunity outside the US as the dollar rolls over. Normality should bring seasonality, history & models back into investor tool kits.
We view the USD as stability’s biggest loser. As such, we remain focused on equity opportunities outside the US in EM and EAFE. Our US equity focus remains on Cyclical- Value such as Energy and Financials as well as SCs. We prefer Credit to Sovereign in FI with a focus on US HY & EM LC. Commodities remain in a secular bull market and we remain OW in our Global Multi Asset (GMA) model portfolio. Our TPW 20 thematic model portfolio remains Climate/Innovation focused – as Big Tech goes ex growth, these segments may begin new bull markets in the year ahead.