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iStrat is the investment strategy and solutions group within Wellington. We are allocators and investors, like our clients. So, where do we think the investment focus should be in the coming year? I’ll highlight three areas that are top of mind:
Over the last few decades, the negative correlation between equities and bonds has provided an excellent balance to many allocations. This last year saw both markets decline, and this positive correlation turned the equity/bond relationship from risk-mitigating to risk-additive.
As our team explained in a recent article, the shift in correlation was driven by the evolving economic environment. Over the past decade, markets came to assume that central banks would respond to any deterioration in macro conditions by cutting interest rates and doing, as former ECB President Mario Draghi once put it, “whatever it takes”. This helped maintain the negative correlation: a struggling economy is negative for equities but positive for duration when the response is lower rates. But now central banks face higher inflation, setting up the potential for a difficult choice: loosen monetary policy if the economic outlook worsens or hike rates to stem inflation. Bonds will struggle in this environment and especially if central banks are perceived to be behind the curve in the inflation fight.
We think inflation will remain a challenge (even if it’s not at current 40-year highs) and central banks and governments will be forced to wrestle with this growth/inflation trade-off. While bonds may still play an important role in portfolios given their potential for income, liquidity and total return enhancement, this high-inflation regime may limit their diversification and downside protection roles. To prepare, allocators may want to consider strategies that can complement the protective role of bonds, including:
In the new economic reality described above, where central banks can no longer focus exclusively on maintaining stable growth, our macro strategist team has argued that we will see a return to a traditional economic cycle with distinct and possibly more frequent moves from one phase to the next. We also expect more cyclical divergence between countries as policymakers make different decisions about the growth/inflation trade-off and as globalization is unwound. Cyclical volatility will likely translate to increased volatility in macro-driven assets, including rates and currencies. This may create challenges but also opportunities to consider:
We believe that we are in the midst of regime change — that is, the economic shifts we’re witnessing are likely structural rather than cyclical (hear more on the subject from Macro Strategist John Butler). With this in mind, we think 2023 will be a year for allocators to ensure they are positioned for the change.
Why investing in themes for EM equities may reap rewards
Portfolio Manager Dáire Dunne outlines why he is increasingly optimistic about the potential opportunities within select EM equity themes this year.
An allocator’s playbook for 2023
Natasha Brook-Walters, co-head of iStrat, examines the three objectives allocators may wish to focus on in 2023.
Spread the risk: Our top three fixed income diversifiers for 2023
Fixed Income Strategist Amar Reganti highlights three types of strategies that may be well positioned to provide fixed income portfolio diversification going forward.
CLOs: Poised to outperform in 2023?
Collateralized loan obligations (CLOs) have been sparking investor interest lately — and with good reason, say Investment Director Andrew Bayerl and Investment Specialist Celene Klimas.
Building climate resilience: Toward a practical corporate framework
The need for systemic climate change resilience is becoming clear. We present a practical framework to help companies enhance resilience in their own operations.
Multi-Asset Outlook — A rocky road to recovery in 2023
Markets may be jumping the gun when it comes to expectations for a policy pivot and the likely risk-asset rewards. Members of our Investment Strategy team still see bumps in the economic road, though their outlook has brightened a bit when it comes to China and other emerging markets.
Small-cap value: Strong past, bright future?
While equity markets have had a challenging recent past, history teaches us that there may be several reasons to be optimistic about small-cap value.
Adding thematic equity investments to a multi-asset portfolio: An allocator’s handbook
Thematic investing may add a powerful return engine to portfolios, but allocators sometimes struggle with implementation decisions. Members of our Investment Strategy Team offer a framework for thinking about allocation size, strategy selection, and performance evaluation.
Take credit: Our five best credit market ideas for 2023
Fixed Income Strategist Amar Reganti highlights credit market opportunities that he expects to arise over the course of 2023, against a backdrop of slowing growth.
Thematic investing focus: The future of food
The global food system has reached a tipping point and change is coming, creating investment opportunities aided by demographic, policy, and innovation tailwinds.
High yield: Opportunity to pivot in 2023?
Our high-yield bond portfolio managers have a guardedly optimistic outlook on the market and believe security selection will be key to benchmark-relative outperformance in 2023.