The Investment Outlook for 2023

• Near-term recession is too close to call. However, lower inflation and slower growth over the next few years seem very likely.
• After a dreadful year, return prospects for bonds in 2023 look much better as the Fed concludes its rate hiking cycle. Investors can take advantage of higher yields in short-dated bonds while adding duration as a hedge against market volatility and maintaining a high quality bias in credit.
• Globally, 2023 should see substantial (albeit incomplete) normalization in inflation levels, a pause in central bank hikes and a hangover for the real economy from last year’s inflation surge and aggressive rate hikes. China may be an exception to the rule of global deceleration, with a slow (but bumpy) shift away from “zero COVID”.
• U.S. equity returns will be driven by earnings against a backdrop characterized by elevated market volatility. In this environment, companies with pricing power and stable cash flows – that are trading at reasonable valuations – are most attractive.

• While risks around the international growth outlook are high for 2023, they are also much better reflected in equity valuations (and currencies) – and “less bad” news can be enough to fuel a powerful rebound once the worst is priced into earnings expectations.
• Alternatives have benefited from an environment of easy money for the past decade – a trend that has come to an end. The new combination of higher rates and demand for capital will allow for more differentiation between winners and losers.
• ESG was confronted with headwinds in 2022, yet commitments from policymakers this year could fuel investments in sustainable technology and infrastructure for the next decade.
• Despite uncertainty on the horizon, significant valuation imbalances across markets mean there is more upside potential than downside risk in investing today.

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