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The views expressed are those of the author 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. For professional, institutional, or accredited investors only.
Reflecting on 2022, we’re confronted with the reality that a new economic and market regime has begun. We expect the new year and those to follow will keep investors on their toes as this transition to a new economic landscape continues to unfold.
Our 2023 Outlook explores the questions: What exactly is this economic “new normal”? How should investors’ strategies evolve to better fit this new environment? How will different asset classes be impacted? Where does this change present risks and opportunities for our clients?
At Wellington, we do not have one unified “house view” on the global economy and markets. That’s because we know that the best investment ideas are often uncovered when a diverse talent pool is encouraged to bring forward a range of unique, independent, and (at times) divergent perspectives and insights. As such, this executive summary distills the distinctive viewpoints of multiple Wellington investors, strategists, and other professionals.
Several of the macroeconomic pillars that have underpinned relatively strong investment performance for the past 20 – 30 years began to crumble in 2022 (Figure 1).
These broad macro dynamics are all intertwined and, taken together, their reversal marks the onset of a new, potentially more challenging economic era for investors.
I think globalization has peaked and some aspects are reversing.
The key takeaway from all of this is that investors will have to contend with looming economic recession risks in 2023, along with other longer-term considerations, and think about how they might need to position their portfolios accordingly.
The hallmarks of this new macroeconomic era have contributed to a weakening of the diversifying relationship between equities and traditional bonds. Investors may no longer be able to count on the classic, often-reliable 60/40 equity/bond split to confer sufficient portfolio diversification. In fact, the historically negative correlation between the two asset classes turned positive in 2022 as both fell in tandem, adding risk to many investor portfolios.
Since conventional bonds may no longer provide the same amount of portfolio ballast as in the past, investors might benefit from searching for equity downside mitigation elsewhere; for example, in hedge funds or defensive equities that might better weather challenging economic environments.
This is not to say that global fixed income has lost all its luster. However, investors may wish to reevaluate their existing fixed income allocations in favor of less traditional opportunities to pursue yield and total return in a risk-aware manner, such as within some higher-yielding credit sectors.
I believe higher-yielding and income-seeking fixed income strategies have the potential to act as powerful buffers against future interest-rate and credit-spread volatility.
Despite the greater degree of uncertainty that attends seismic shifts in the macroeconomic landscape, there are always opportunities to be found. Notable thematic investment game changers to watch for in the future include climate change and sustainability, rapid digitization, and aging demographics. These big-picture trends create fertile ground for disruptive innovations and blossoming industries on which investors might seek to capitalize. What’s more, thematic equity investing could be an effective solution to rising economic and business cycle risks.
In today’s era of heightened market volatility and rampant investor ‘short-termism,’ having conviction in compelling, long-term structural trends could prove to be a defining edge.
On the sustainability front, as climate-change mitigation and adaptation efforts continue to become ever-more important, several far-reaching ESG-related themes look poised to gain traction. These range from environmental initiatives like cleaner energy alternatives (e.g., electric vehicles) and biodiversity protection measures, to social and governance issues such as diversity, equity, and inclusion, human safety, shareholder rights, and cybersecurity.
We expect to engage with companies on their potential biodiversity risk exposure, including the physical risks of weakening ecosystem.
Another path to enhancing upside potential in investor portfolios may be through alternative investments, including both private equity and private credit to complement public-market allocations. The private-equity sphere, for instance, appears to have ample room for growth and may offer some attractive return opportunities.
This past year may have marked the death knell for one macro regime and the birth of another. But with big, ongoing economic and market changes, no matter how uncertain or uncomfortable, come new possibilities for discerning investors. To wit, we believe the new investment setting may prove to be one that is well suited to skilled, active portfolio management.
For another view of our 2023 outlooks, please see Picture this: Our 2023 economic forecast in 5 charts. This series of images captures key investable ideas across our macro, equity, bond, alternative, and sustainable investing outlooks.
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.
Picture this: Our 2023 economic forecast in five charts
We explain the shifts the market is undergoing, analyze the implications for different asset classes, and identify potential risks and opportunities in a series of visuals.
China equity in 2023: Year of the stock picker
Despite the potential risks of investing in China equity, Equity Portfolio Manager Bo Meunier believes there are attractive opportunities for patient, discerning stock pickers.
Health care outlook for 2023
Looking ahead to 2023, members of our health care team see meaningful innovation, supportive valuations, and a benign political and regulatory backdrop across biopharma, medical tech, and health care services sectors.
China’s economy: Poised to exceed expectations in 2023
With the bar set so low for China's economy, Macro Strategist Santiago Millan thinks it won't take much for an upside surprise in 2023.
Why Europe could surprise in 2023
Eoin O’Callaghan and John Butler discuss the contrasting prospects of the Euro Area and the UK and why 2023 could bring positive surprises in the region.
Private equity outlook: Why we see a buyers’ market ahead
Co-Head of Private Investments Michael Carmen shares his outlook for the private equity market, highlighting today's normalizing multiples, continued innovation, and, in a number of cases, fewer competitors for the most attractive deals.
Private credit in 2023: The benefits of a bear market?
We explore conditions in investment-grade private credit and go deeper on how today’s challenging overall market landscape could fuel opportunities for investors.
Five key ESG topics for private companies in 2023
Our ESG for Private Investments Team explores five critical ESG topics for private companies in the year ahead.
2023 ESG & Sustainability Outlook
Our head of Sustainable Investment shares key areas of focus for 2023, including climate change and biodiversity, modern slavery, data privacy, shareholder rights, and impact investing,
Opportunity in disguise: Why bad news may be good for alternatives in 2023
Multi-Asset Strategists Nick Samouilhan and Adam Berger explain how alternative investments may help allocators make tailwinds out of macro and market headwinds in the year ahead.