Four mission-critical investment ideas for 2023 and beyond 

Nick Samouilhan, PhD, CFA, FRM, Head of Multi-Asset Strategy – APAC
Michelle Ng, Investment Strategist
2023-11-30
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

Multi Asset Strategist and Portfolio Manager Nick Samouilhan and Investment Strategist Michelle Ng offer their latest perspectives on the 2023 outlook and some actionable takeaways for investors.

Key points

In this era of 24-hour newsfeeds and relentless social media chatter, it’s easy for many investors to get caught up in the day-to-day market headlines and latest trending topics. Often, though, having perspective on “big-picture” ideas can better help frame and guide sound long-term investment decision making. In that spirit, and with 2023 nearly upon us, here are four such ideas that could exert considerable influence on the markets in the years ahead.

1. Re-strategize for an altered macro regime

While some of the global challenges that have surfaced this year are due to transitory short-term factors (e.g., recession risks, the Russia/Ukraine conflict), we view others as early indicators of a dramatically evolving macro and investing regime.

The capital markets do not operate in a vacuum. Accordingly, how they have performed this year is at least partly a reflection of today’s broader macroeconomic and geopolitical backdrop — one that is in the midst of being reshaped by powerful forces that may persist or even intensify going forward. Deglobalization, for instance, should lead to sharper dispersions among countries and regions, more volatile currency markets, and worsening trade-offs between growth and inflation. Speaking of which, global inflation could easily be much harder to control in the next 10 years than in the past 10, so defending against it should be a priority for many investors.

The new regime, then, is likely to be one in which borrowing is more expensive, liquidity tighter, the economic cycle less predictable, and consumer and business spending more variable. From an active investment standpoint, this may translate to divergent outcomes for quality growth companies — well-run firms with effective debt and cost management, as well as healthy revenues and earnings — versus others with more vulnerable business models, heavier debt burdens, and less resilient revenues and earnings.

Consider investment solutions that focus on:

macro1

Inflation-hedging assets or those that seek to provide some inflation protection

commodities2

Quality companies that can navigate a low-liquidity environment

alternatives03

Bottom-up, fundamental research and individual stock selection

2. Step up the search for dependable income

The big macroeconomic surprise of 2022 was inflation rising higher and staying “stickier” than expected, which led many global central banks to hike interest rates in an effort to cool their economies and thereby lower inflation. This has created a very tough environment for investors focused on generating reliable income, as traditional bonds and other income sources have fallen in value as interest rates have risen. At the same time, elevated energy, transport, and food costs have impacted what households can spend money on, while higher interest rates have weighed on the construction and housing markets. As a result, many income-producing assets and dividend-paying stocks have also come under strain.

While we suspect that many central banks’ rate-raising cycles may be closer to their end than their beginning, 2023 is likely to pose continued headwinds for income-seeking investors given the threat of further rate hikes, along with slowing global growth and general economic uncertainty. As such, we believe active portfolio management will be key to generating dependable, ongoing investment income. Look for flexible, diversified income strategies that aim to provide favorable risk-adjusted returns.

Consider investment solutions that focus on:

sustainability3

Generating reliable income from diverse sources

multiasset1

Adding value through a dynamic, flexible approach

macro2

Nimble credit sector rotation in response to market moves

3. Invest in enduring structural changes

While there is much (justified) discussion these days around short-term worries about inflation, recession risks, and interest rates, investors should not lose sight of the potentially compelling structural opportunities that can drastically reshape how we live, work, and play — and, indeed, already have to a large degree. The COVID pandemic accelerated or initiated lasting fundamental changes in key areas such as virtual consumerism and digital infrastructure. Less appreciated has been the impact COVID has had on technological advances in the medical industry and in seemingly unrelated industries like education, where we experienced the largest “learning experiment” in the history of humankind.

The problem is that many investment strategies, particularly those that closely track a passive investment index, will by definition allocate to yesterday’s winners, which may not necessarily be tomorrow’s winners. We believe investing in the global trends of the future requires a dedicated allocation to thematic strategies designed to “play” longer-term structural transformations. Like shifting tectonic plates, these changes may be small and imperceptible in the short term, but over multiyear time horizons may be all that really matters.

Consider investment solutions that focus on:

equities1

Longer-term structural or thematic changes

alternatives5

Forward-looking fundamental analysis

alternatives4

“Pure-play” investment exposures

4. Adapt to climate change and sustainability

Returning to the concept of long-term structural change (see above), one of the most profound structural changes occurring worldwide is climate change. While climate change is a complex multidecade phenomenon, its material impacts on the global economy and markets are already being felt.

Fortunately, even as climate change marches inexorably onward, we are also seeing many more firms, regulators, and governments take proactive steps to address this critical issue and mitigate the attendant risks. For example, a number of governments have announced spending plans to speed up their transition to a low-carbon economy, especially around energy production. Meanwhile, market participants are increasingly examining individual companies’ carbon footprints and energy-transition plans before investing in them. Collectively, these and other positive developments have helped to put the world on a more sustainable, environmentally friendly path.

Ironically, however, this growing level of government and corporate involvement highlights an oft-overlooked aspect of the whole conversation around climate change. Specifically, with all the talk about risk management — what can go wrong and how to avoid it — investors should bear in mind that climate change also offers attractive return opportunities where capital can still be directed toward “doing some good” for the world.

Consider investment solutions that focus on:

sustainability2

Scientific insight on the physical risks of climate change

equities2

Understanding the transition risks of climate change

alternatives6

Companies making material, measurable impact to address unmet needs

Position for the long term, be ready for the short term

In our view, 2023 should be about positioning portfolios for the long term while still being prepared for what the shorter term may bring. To gain exposure to and effectively capitalize on these investment ideas, we believe skilled, research-based, active portfolio management will be key.

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