As the investment and financial services industry moves from 2022 to 2023, fund operators should have their eyes on a few key concerns and opportunities. These topics include macroeconomic factors such as inflation, geopolitical unrest, the search for liquidity, declining equity value, and resulting opportunities in fixed income.
It remains to be seen how these factors will shape markets in the first half of the year, but many in the industry are predicting further uncertainty, though hoping for calm amidst the storm.
Inflation trends in the US
A recent BlackRock study on the “Q1 2023 Equity Market Outlook”, said that it believed inflation had peaked for this cycle, even though it is retreating slowly. If it plays out, this belief means good news for asset managers and fund operators who have seen added reporting headaches due to instability and inflation in 2022.
“While the [US] Consumer Price Index (CPI) hasn’t declined at the hoped-for pace since its high reading of 9.1% for June, anecdotal data on the economy is moving more quickly: Housing demand and prices are easing, consumer confidence is waning and retail sales growth is showing some signs of stalling. This suggests CPI will eventually catch up, then giving the Fed room to pause its rate-hiking campaign,” said the analysis.
Kelly Chung, Investment Director and Head of Multi-Asset at Value Partners Group, said that 2023 will be another volatile year. She was quick to point out that the imminent threat of recession in the US means that the US Federal Reserve will need to continue to adjust accordingly.
However, she said she eventually saw inflation slowing down, despite “remaining higher than the Fed’s 2% target in 2023.” Chung added that service inflation – for example, rent and wages – is tricker to bring down and will contribute to this prediction.
Rate hikes in Europe
However, when it comes to European markets, Alberto Matellan, Chief Economist at MAPFRE Inversión – the Spanish insurer’s investment arm – took a slightly different stance.
“With inflation expected at 6% by 2023, you can't think that the ECB will stop hikes at 3%.”
After the European Central Bank’s (ECB’s) 15 December announcement about raising interest rates, he said that "with inflation expected at 6% by 2023, you can't think that the ECB will stop hikes at 3%. Either the inflation expectation changes, or the rate expectation changes, with consequences for the market.”
Matellan added that the current inflation situation favours companies that are larger, more robust operationally, and thus more resilient to a rising rate environment. “Companies that have benefited from the expectation of a ‘pivot’ in the last two months could suffer [now],” he continued. This means that it is possible asset managers will see turnarounds in the equity market come 2023.
This sobering outlook for the EU was echoed by Nicolas Malagardis, Market Strategist at Natixis Investment Management Solutions, who said that while he believes EU inflation will continue to decelerate, overall financial conditions will deteriorate further. “Although at a reduced pace, central banks will continue to hike policy rates in 2023.”
Malagardis added that European governments will likely use fiscal policy to offset this tightening, as purchasing power in European households is looking particularly bleak.
“[European governments] will find it more difficult to use fiscal policies to support the economies when their monetary policies are still in a tightening mode.”
However, in Chung’s view, this situation presents a Catch-22: “[European governments] will find it more difficult to use fiscal policies to support the economies when their monetary policies are still in a tightening mode,” she said. She added that she believes a European recession is likely in 2023, due to what she sees as a high chance of stagflation.
For fund operators, heightened rates and increased recessionary conditions could mean added administrative costs as capital is reassessed and reallocated to healthier asset classes – with guaranteed liquidity – in the new year.
Opportunities in fixed income
Because 2022 was a volatile year for developed economies – which saw geopolitical events and inflation take centre stage in North American and European markets – most asset classes suffered hard hits. This opens new avenues for underdiscussed asset classes that offer managers and investors more stability amidst the chaos.
“2023 will be a friendlier fixed income year than 2022.”
“2023 will be a friendlier fixed income year than 2022,” said Ben Barber, Director of Municipal Bonds at Franklin Templeton Fixed Income. He added that relative valuations are currently at generally attractive levels, which means that the municipal bond market, in particular, offers compelling value for both tax-exempt and taxable fixed income investors in the US.
This outlook was echoed in BlackRock’s study, which predicted that given recent “speedbumps” in the equity market, 2023 will see an increased need for balance and resilience in portfolios. Fixed income – US municipal bonds in particular – could provide these elements and offer asset managers a new market foothold.
“An active allocation is needed to manage risk carefully under such a difficult market environment.”
Chung offered her support for alternatives, which she felt would do well despite volatility. “We believe energy will remain supported while gold is a good hedge against any escalation of geopolitical risks,” she said. “An active allocation is needed to manage risk carefully under such a difficult market environment.”
For fund operators, these difficulties and developments mean changes to reporting needs and an added necessity for transparency throughout business pipelines. They will need to keep their noses to the ground as there are likely to be surprises along the way.
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