State Street Global Advisors (SSGA) has published this year’s Global Market Outlook: Navigating a Bumpy Landing, outlining the key trends and investment themes for 2023.
The asset manager foretold that next year “will not be a straight path” as global economies continue to grapple with inflation, tightening, and expectations of lower economic growth.
“We expect market uncertainty and volatility to persist for some time, leading to a bumpy journey ahead with a wide range of possible outcomes,” the report explained.
Noting that while “we are on the brink of overtightening”, SSGA predicted that “more clarity” will be achieved in 2023 as rates peak in much of the developed world.
Caution, it said, “is warranted” given the potential for both persistent inflation and overtightening by central banks.
As such, this increased volatility is expected to continue to incentivise more investors to seek downside protection as they await a possible recovery.
Commenting on this, Altaf Kassam, EMEA head of investment strategy and research, said: “We believe that the ‘Great Moderation’ period is over, with central banks less likely to backstop markets as they fight inflation and look to reduce their balance sheets.
“The ‘new normal’ higher volatility environment should still provide opportunities for equity investors, but it will also likely feature deeper drawdowns and shallower recoveries. Actively managing the risk of the current environment will require effective downside protection strategies.”
Regarding global economic growth, SSGA said it has lowered its projection to 2.6 per cent next year — half a percentage point less than it was three months earlier.
“We have seen the global economic slowdown intensify across both developed and developing economies, and we have lowered our projected global growth to 2.6 per cent in 2023,” said Lori Heinel, global chief investment officer.
“The near 20 per cent appreciation of the US dollar in 2022 has also intensified the global growth challenge and may expose unanticipated vulnerabilities.”
Despite these vulnerabilities, the asset manager predicted a point of inflection over the next six to 12 months, characterised by improved conditions.
Its market outlook determined that a powerful disinflationary episode lies ahead, followed by improved supply and slowing demand predicted to unfold in mid-2023.
As such, it flagged the possibility that more favourable inflation data will allow the Federal Reserve to downshift from its hawkish stance, and cut rates in the last quarter of 2023.
Expounding on the performance of equities, SSGA predicted a recovery in 2023, with the exact timing of the relief for equity investors tied to the actions of the central banks.
“Against this challenging macroeconomic backdrop, we are focusing on quality stocks, by which we mean companies with stable earnings and strong business models, which we believe are resilient enough to manage pricing pressures,” said Gaurav Mallik, chief investment strategist.
“In emerging markets, the weakness of China markets and the strong US dollar limit equity opportunities. We expect that challenges and volatility will remain in 2023, but we also believe that investors should be prepared for a recovery and may benefit from deploying dry powder at a prudent time.”
