The Investment Outlook for 2023

Macro

Global real GDP is forecasted to grow by 2.2 percent in 2023, down from 3.2 percent in 2022.
Japan has so far maintained looser policy settings; but any shift away from its current yield curve control could lead to unintended consequences for the yen and potentially add another layer of risk to the already elevated levels of volatility in FX markets

Our base case remains a hard landing. [Fidelity]
While a 2023 recession is quite possible, it should be a mild one if it occurs. More importantly, with inflation continuing to fade and fiscal policy likely on hold
By 2024, the U.S. economy may well be back on a path that looks much like that of the late 2010s – slow growth, low inflation, moderate interest rates and strong corporate margins. it is an environment that could be very positive for financial markets.

First, consumer spending will be hit by the lagged effects of fading fiscal stimulus.
Second, both home building and home buying are falling sharply due to a more than doubling of mortgage rates since the start of the year.
Third, both slower growth overseas and a high dollar should hurt international trade in the year ahead.
payroll job growth positive into 2023 and limit any increase in the unemployment rate in 2023.
Inflation pressures are continuing to fade

The Fed is widely expected to enter the final inning of its rate hiking cycle in 1Q23.
25bps increases in February and March
All things considered, the upside risk the Fed hikes too much is limited,

With investment-grade (IG) and high-yield (HY) corporate bonds yielding close to 6% and 9%, respectively
credit spreads have not widened enough, particularly for low-quality bonds, to compensate for the rising risk of default amid a rising economic backdrop next year
credit spreads have not widened enough, in previous non-recession market corrections, IG and HY spreads peaked at roughly 250bps and 850bps,

Treasury market is less liquid than in previous years, it is not so unusually illiquid as to warrant concern.
Though not an immediate issue, lower-than-normal liquidity could lead to continued fixed income volatility in 2023.

An overweight to IG bonds seems appropriate relative to HY.
Investors should take advantage of yields in short-dated bonds, while increasing exposure to long-dated bonds which should benefit from declining yields driven by falling inflation and real growth.
Rate cuts will likely have to wait until 2024 (with the exception of some emerging markets, like some in Latin America)
Rate hikes should end as the second quarter of the year begins (with the exception of Japan
China follows its own economic, policy and political cycles separate from the rest of the world.
As the rest of the world decelerates, China may finally pick up a bit of steam
the U.S. dollar was up 9% year-over-year by the end of November to its highest level, in real terms, since 1985. it may be delayed until rate differentials stabilize convincingly and global economic growth surprises turn less negative.

- The US economy, and the US consumer, have been defying expectations. US consumer spending continued to support real GDP growth despite the dual headwinds of rising interest rates and high inflation.
if a recession can be avoided, we would expect earnings to be roughly flat relative to 2022 levels.
if the U.S. economy falls into recession, history suggests earnings could decline by as much as 15%–20%.
We have seen peak inflation, peak Fed hawkishness and (hopefully) peak geopolitical tensions, but these issues have not gone away and will remain as a source of volatility.
In fact, since 1960, the S&P 500 has bottomed an average of 6 months before the unemployment rate has peaked.

Chinese equities (and hence broader emerging markets) have the potential to be the first to turn in the right direction.
It is key for investors to invest in the “new new China” by focusing especially on A-shares, which grant exposure to the priority areas of business technology, domestic demand and the energy transition

Europe where consensus still looks for 0% earnings growth amidst a likely recession)
In contrast, every other major region now has valuations significantly below their long-term averages, especially Japan (-35%), Europe (-18%) and China (-15%).
the valuation discount of international equities to U.S. markets is now at -30%,
Historically, investors have been rewarded for investing when confidence is already depressed due to cyclical considerations.
Luxury goods companies listed in Europe that derive the majority of their revenue from emerging consumers.
- Large parts of Europe have likely entered into recession as of Q4 2022

Looking across real assets more broadly, infrastructure can help hedge against inflation, and transportation assets should benefit as global trade continues to normalize.
a two- to three-quarter lag between public equity market drawdowns and markdowns of private equity assets.