MacroResearchBoard

The Cycle Is Maturing, But Still A Challenging Outlook – December 5, 2022

A just-published report outlined the expected global financial market performance in the year ahead.

The current risk-on phase will likely last for a few months, but the 6-12 month investment climate will remain challenging given economic growth and policy uncertainty, and despite better valuations than a year ago. Investors are already overly optimistic about Fed rate cuts in 2H2023, especially given an expected resilient global economy and sticky inflation.

We expect that multi-asset portfolio returns will continue to be volatile, with middling performance most likely over the year as a whole. Accordingly, we remain overweight cash in a multi-asset portfolio. Another leg up in bond yields is probable beyond the near run, and we remain underweight in a multi-asset portfolio. Bond investors will need to be tactical, while staying overweight investment-grade corporate and EM local-currency bonds within a fixed-income portfolio.

Meanwhile, despite a near-run risk-on phase, there is limited sustainable upside for global equities on a 6-12 month horizon, with earnings expectations destined to get downgraded and valuations not appealing, particularly in the U.S. A rotation away from the U.S. is probable in 2023, and euro area stocks remain our favored regional market. Moreover, non-U.S. markets should benefit from our expectations that the U.S. dollar will generally be soft in 2023.