Shifting Markets

Shifting Markets

A year of (almost) two halves

Daniele Antonucci
Chief Economist & Macro Strategist

Financial markets have been dominated by rising interest rates over the past year as the world’s major central banks continued to focus on taming persistently high rates of inflation. Their efforts to apply the economic brakes are working, with the euro area and UK likely beginning 2023 in recession. The US economy is also likely to contract at some point, although less severely. 

This prolonged high inflation was partly driven by disruptions to Russia’s supply of oil and gas to Europe owing to the Ukraine War, which pushed up energy prices. This headwind is likely to continue in the first half of the year. Another drag on the world economy has been China’s zero-Covid policy. A series of prolonged lockdowns affected manufacturers and their suppliers, which has caused the country’s exports to fall. But with China now looking to relax its Covid-restrictions, we could see growth pick up again. 

Markets in transition
We believe conditions will start to improve from spring as the interest rate hiking cycle ends, inflation slows more visibly and China’s reopening progresses. These shifts are likely to trigger a new global economic cycle, with the key regions expanding at their own speeds. 

With markets set to go through this transition over the next year, we believe investment strategy at the start of 2023 is less about whether to increase or decrease risk in portfolios, and more about focusing on positions within key asset classes and regions. Having said that, unexpected events can appear that cause large shifts in investor sentiment (as clearly shown in recent years) so we’ll be monitoring markets for any catalysts that would give reason to change our approach.  

Following one of the most challenging years in decades, the current cycle is ending and a new one is likely to begin, paving the way to a new investment environment.


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.

house icon

Inflation peaks
then moderates 

hammer icon

Central banks
stop hiking 

graph icon

China’s economy
picks up

Source: In-house research, Refinitiv; note: dotted line = own forecast.



Markets: 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.


Key macro & market views 

The US economy appears relatively resilient

We believe US inflation has peaked, and following a poor performance in 2022, the high-quality US equity market will come to the fore in 2023. US Treasury yields are also attractive given the economic deterioration we expect in the first part of the year.

Read more >

A recession is likely in the euro area

We believe that, unlike the US, inflation in the euro area is yet to peak, which means the European Central Bank may need to continue increasing interest rates. Bond yields should then begin to fall in both the euro area and the UK, where we expect similar dynamics.

Read more >

Attractive valuations across emerging markets

China’s economy is a key driver of growth across emerging markets, and we believe the Chinese government will stimulate its economy in 2023 and buck the weak global growth trend. This is why we believe emerging market assets, both equities and hard currency sovereign debt, could perform well in 2023.

Read more >


As we move into 2023, we believe the
outlook for the dollar is one where it weakens slightly,
allowing central banks across emerging markets
to stop hiking interest rates.


Our portfolio positioning

We are starting 2023 with a combination of equity and fixed income exposures. These positions reflect our outlook for markets over the next 12 months. However, we are mindful that the investment environment is an evolving one and conditions can soon change. So, we are ready to adjust our positioning if our views on the economy and monetary and fiscal policies change. 

Moving the dial on risk
What would it take for us to increase and reduce risk more generally in portfolios? All else being equal, here’s what we’d do:
  • Increase risk if inflation, interest rates and bond yields fall more rapidly than expected, the Ukraine War ends, or China reopens quickly.
  • Decrease risk if central banks overtighten monetary policy, there’s a further inflation spike due to energy and wages, or – apart from an always possible black swan – the tensions between Russia and Ukraine and/or China and Taiwan deteriorate.
Read more about our portfolios
Not time to re-risk yet

Our overall equity exposure is still slightly underweight. Although stock markets picked up at the end of 2022, we do not think it is yet the time to increase exposure to risk in our portfolios…

Not time to re-risk yet
Corporate bonds: add high-quality, reduce low-quality
Our exposure to corporate bonds is neutral after being overweight previously…
Corporate bonds: add high-quality, reduce low-quality
Government bonds
Government bonds

We have increased our overall government bond exposure to reflect our views on the global economy, moving from underweight to overweight. We expect further declines in bond yields over the course of 2023 as inflation continues to decelerate and market expectations shifts towards central bank rate cuts…

Read more about our portfolios

Government bonds
Cash & gold
Cash & gold
Peak rates suggest the dollar may benefit less from here – as the Federal Reserve is no longer outpacing other central banks. This takes away a key driver of past dollar strength. A less risk-off environment as the year progresses should also contribute to some moderate dollar weakness… 

Read more about our portfolios
Cash & gold


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