Outlook 2023: See the Potential
Most things that could have gone wrong for investors did in 2022. Markets that entered the year with extended valuations buckled under high inflation, an aggressive global rate-hiking cycle, and the war in Ukraine. Unusually, both stocks and bonds suffered big losses in 2022 — one of the worst years ever for a balanced portfolio. But here’s the good news. Precisely because markets are so battered, lower equity valuations and higher bond yields, in our view, offer investors the most attractive entry point for a traditional portfolio in over a decade.
As we look ahead to 2023, here are the key themes that J.P. Morgan Private Bank thinks will drive investment strategy in the coming year.
• Recession more likely than not. We expect a recession in both the United States and Europe, as the frictions from higher interest rates, the war, and growth challenges in China continue to mount. The good news with the bad: we believe a recession will force inflation to fall through 2023 and into 2024. Importantly though, we don’t expect a downturn anything like the Great Recession.
• Bonds provide potential for yield, protection and capital appreciation. While the economy weakens, we think markets will stabilize – this year’s selloff has created the most compelling entry point for multi-asset investors in over a decade. The balance of risks are in fixed income’s favor, and we see opportunities across the curve. Core bonds offer compelling income, capital preservation, and potentially double-digit total returns.
• Expect choppy stock markets over the next few months. Focus on quality and look for entry points. We are looking to areas of the market that are well-priced and offer attractive growth—small and mid-caps and themes like energy transition, shifting global supply chains, a new emphasis on traditional and “smart” security, and the future of food production and consumption could offer opportunities for the next several years.
• Alternatives provide potential for excess returns, benefit from long-term economic shifts. Alternative investments such as hedge funds that focus on rates, currencies, and cross-asset correlations had a banner year and proved their worth as portfolio diversifiers. In 2023, gold may serve a similar purpose as the dollar and real interest rates find their peaks. Going forward, we may also see distressed opportunities in real estate and credit as the growth backdrop deteriorates.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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