2023 Global Investment Strategy Outlook

Investors could find themselves a bit whipped in 2023 as inflation and some of this year’s other dominant market trends reverse completely, according to Morgan Stanley Research’s 2023 strategy outlook.

“For markets, this presents a very different backdrop to 2022, which was marked by resilient growth, high inflation and hawkish politics,” said Andrew Sheets, chief multi-asset strategist for Morgan Stanley Research. “Overall, 2023 will be a good year for income investing.” Bonds – the biggest losers of 2022 – could be the biggest winners in 2023, as global macro trends moderate inflation next year and central banks suspend rate hikes. This is especially true for high-quality bonds, which have historically performed well after the Federal Reserve stopped raising interest rates, even during a recession. Likewise, emerging market equities and debt, which were early to underperform in this economic cycle, may be early to recover in the next, as was the case after the dotcom crash of the early 20s. 2000 and in 2009 after the financial crisis.

  • Yields on 10-year Treasury bills will end 2023 at 3.5% from a 14-year high of 4.22% in October 2022.
  • With favorable prices, securitized products, such as mortgage-backed securities, will provide benefits.
  • The S&P 500 will tread water, ending 2023 around 3,900, but with significant swings along the way.
  • The US dollar will peak in 2022 and decline through 2023.
  • Emerging market and Japanese stocks could generate double-digit returns.
  • Oil will outperform gold and copper, with Brent, the global oil benchmark, ending 2023 at $110.

Overall, investors will need to be more tactical and pay close attention to the economy, legislative and regulatory policies, earnings and company valuations, says Mike Wilson, chief investment officer and chief U.S. equity strategist at Morgan Stanley. “Because we are closer to the end of the cycle at this point,” says Wilson, “trends in these key variables may zigzag before the final path is clear. Although flexibility is always important for a successful investment, it is essential now. »

The performance of a multi-asset income portfolio has rarely been so attractive, according to analysts at Morgan Stanley.

In 2023, when interest rates are expected to fall, conditions bode well for stable and attractive bonds, as prices move in the opposite direction of yields. Bond strategists at Morgan Stanley predict high single-digit returns through the end of 2023 for German Bunds, Italian government bonds (BTP) and investment-grade European bonds, as well as Treasuries, investment grade bonds, municipal bonds, mortgages. backed securities issued by government-sponsored agencies and AAA-rated securities in the United States

However, investors should keep a close eye on quality. High-yield US corporate bonds may look attractive, but they may not be worth the risk during a potentially prolonged default cycle. “We are wary of unfinished business with high yield,” says Vishy Tirupattur, global head of fixed income research.

Conversely, securitized products, such as mortgage-backed securities, vehicle-backed securities and secured debt securities, could provide income opportunities. The spreads – or the excess return over lower-risk government bonds with similar maturities – are the widest they have been since the pandemic. Meanwhile, rising rates are limiting the supply of new securities coming to market.

This is especially true for agency mortgage-backed securities. “Not only are they the most liquid assets, but they are also starting from the most attractive valuation. Notional spreads on mortgages produced today have not been this wide since the fourth quarter of 2008,” says Tirupattur. “Furthermore, the slowdown in real estate activity will reduce the net supply of these securities.”

Equities next year, however, are heading for continued volatility, and we expect the S&P 500 to end next year roughly where it started, at around 3,900. “Consensus earnings estimates are just too high, to the point where we believe companies will hoard labor and see operating margins squeezed in a very slow-growing economy,” Wilson said. To this end, investors should consider the higher yielding segments of the equity market, including consumer staples, financials, healthcare and utilities.

European equities could offer a modest upside, with a projected total return of 6.3% over 2023, as falling inflation pushes up equity valuations. “This should ultimately more than offset the 10% decline in earnings per share that we expect due to weaker topline growth and significant margin disappointment,” said Graham Secker, chief financial officer. European and UK equity strategy. Financials and energy are more likely to perform well in this environment, he says.

It’s been a major bear market for emerging markets, but the tide could turn, says Jonathan Garner, chief equity strategist for Asia and emerging markets. “Valuations are clearly cheap and cyclical winds are turning in favor of emerging markets as global inflation declines faster than expected, the Fed stops raising rates and the US dollar declines,” he said, adding that in recent economic cycles, emerging markets have rallied before uS markets.

In particular, investors should monitor:

  • Mid- and large-cap companies: The MSCI EM, an index of mid- and large-cap companies in 24 emerging markets, could post returns of 12% in 2023. Japanese equities, meanwhile, could benefit from a combination of low valuations and idiosyncratic tailwinds. – translating into 11% gains for the Tokyo stock price index next year.
  • Emerging market debt: Another potential bright spot, emerging market debt could benefit from a combination of trends including falling rates, improving economic fundamentals and a weaker dollar. Fixed income strategists forecast a 14.1% total return for emerging market credit, driven by a 5% excess return and a 9.1% contribution from falling US Treasury yields. Emerging market local currency debt is expected to post an even higher total return of 18.3%.

Bull/Bear outlook for global equities.

For more insights and analysis from Morgan Stanley Research on the global macro economy, ask your Morgan Stanley representative or financial advisor for the full report, “The Year of Performance” (November 13, 2022). Morgan Stanley Research clients can access the report. directly here. More more ideas from Morgan Stanley thought leaders.

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