Investors’ Outlook: Do you think of a winter of discontent? Or of taking on challenges?

Looking back on 2022 and also previous years, there’s no doubt we’ve been confronted with momentous change, from the pandemic and its overcoming to worries about war, inflation, the climate, and energy security.

Not long ago, the US Federal Reserve unleashed the steepest hiking cycle in decades, and we witnessed the highest inflation since the 1970s. “Deglobalization” suddenly became a buzzword, as did “energy crisis”. More bad news came in the form of Russia’s invasion of Ukraine, the unravelling of cryptocurrency markets, and China’s commitment to a very strict zero-Covid policy and lockdowns.

Meanwhile, on the sunnier side of things, investors can look back on historically low unemployment rates and a resilient global consumer that was spending like there’s no tomorrow – keeping corporate profits near record highs. It’s also worth noting that some countries, such as Mexico and Indonesia, benefited from the post-pandemic phenomenon of nearshoring, i.e. bringing production capacity closer to western consumers, or moving it away from the dominant Chinese workbench. Moreover, commodity-exporting giants like Brazil reaped the benefits of strong supply disruptions in global agriculture as well as base metals.

Still, 2022 wasn’t the plain sailing that markets and investors had grown accustomed to during decades of apparently unlimited money supply by central banks. Global synchronized growth and an artificial suppression of the cost of capital led to frothy asset prices. This period is now definitively over and 2022 is likely to go down in the financial market history books as one when we had to start paying the price for a decade of excess.

Some fixed-income segments beckon

The sailing will hardly get smoother anytime soon, but as investors, we are tasked with constantly finetuning our asset allocation to balance risk and return. And from our current vantage point, we see a number of things worth considering. Take fixed income, for example. With yields on government bonds having risen to more than 4%, anyone looking for cheap “risk-free” assets may feel intrigued. Pricing and yields on emerging-market debt could seem similarly enticing.

Equities will be challenged as we go into a recession across most of the developed world. But there too are some nuggets waiting to be unearthed by discerning investors, in our opinion.

The almost unheard-of close correlation between the two asset classes – they both fell in unison in 2022 -- should unwind, we believe. This means multi-asset investors stand to bounce back from what’s been an unusually difficult year.

It is our hope that we won’t face a winter of discontent. And even if there should be occasional glitches in, say, our power supply, we as a society and as investors have always found ways to emerge stronger from a crisis. Therefore, let me wish you all the best for 2023.