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Investment outlook

The economy and markets

A cross-country skier travels next to a snowy forest

Key points to know

Inflation should finally decline.

Global inflation remains very high heading into 2023, but we see signs it has peaked. As consumer spending growth normalizes and the goods/services balance is restored, corporate profit margins will likely compress. At the same time, global real estate and labor markets are showing signs of returning to balance, reducing upward pressure on rent and wages, both key drivers of inflation. Energy costs remain a wild card with geopolitical risk influencing oil and gas prices, but even a plateau at current levels would provide a meaningful drag on global headline inflation over the next few quarters. Countries where central banks have already layered in substantial policy tightening appear to be ahead of the game in bringing down inflation (Figure 2).

Figure 2: The beginning of the end of inflation, or the end of the beginning? It depends where you are.

But economic growth will slow, too.

Investors will celebrate the easing of inflation and the corresponding lessening of pressure on central banks to tighten policy. But in the wake of declining inflation, we’ll find a global economy still nursing a hangover from the post-pandemic reopening binge, hampered further by higher borrowing costs and diminished savings. This may lead businesses to slow their pace of hiring — or reverse course to reduce headcounts — which will, in turn, weaken consumer spending even if income growth once again starts to outpace inflation. Countries like China and Japan remain sensitive to export demand but have also seen their domestic economies struggle. Meanwhile, Europe’s fate remains closely tied to global commodity prices, energy preparedness and, yes, the weather.

Inflation risks may be fading. But recession risks are growing.

We expect varying resistance to recession across countries.

2022 pitted the irresistible force of higher rates against the immovable objects of consumer spending and hiring demand. For countries to stay out of recession in 2023 — or keep those recessions mild when they occur — it will take a combination of carefully calibrated monetary policy and increased use of consumer balance sheets (i.e., reduced savings and increased credit). Job security will become the key variable to watch for consumer strength. Consumers save less and spend more when they feel confident in their employment prospects. While unemployment rates remain low around the world, the “immovable objects” will likely start to budge sooner in Europe and emerging markets than they will in the U.S.

Policy risks aren’t going anywhere.

Ask most investors, and they’ll tell you that inflation was the single largest obstacle to generating positive returns in 2022. But that’s not quite right: It was actually central banks’ collective response to that inflation that sank diversified portfolios. Higher discount rates took down equity valuations — though not profits just yet — and led to substantial losses on most categories of fixed income. The risk that rates go even higher as central banks struggle to fully break inflation may keep markets on edge. And even if policymakers sound the all clear on further rate hikes, the environment that follows is likely to feature either higher rates for a prolonged period (our base case), or a dramatic rally in government bond markets driven by a severe macroeconomic downturn (our primary downside risk case). Neither of these scenarios promises a smooth melt up for diversified portfolio balances in 2023.

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All market and economic data from Bloomberg, FactSet and Morningstar.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.

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