Our senior investment leaders discuss their market and investment themes for the coming year.

TEN FOR 2023

MACRO: BACK TO THE “OLD NORMAL”

  1. A YEAR OF PEAKS AND TROUGHS WITH A RETURN TO THE “OLD NORMAL”
    We think the next 12 months are likely to see this cycle’s peaks in global inflation, central bank policy tightening, core government bond yields and market volatility; and troughs in GDP growth, corporate earnings growth and global equity market valuations…
  2. ADJUSTING TO HIGHER RATES CONTINUES TO DISRUPT
    The cost of capital for individuals, corporations and sovereigns is going up. We believe the change is structural, and it is proving unusually large and unusually rapid. That raises the risk of a disruptive rather than orderly adjustment…
  3. MORE DE-GLOBALIZATION
    Manufacturing supply chains, commodity markets, financial systems, regulatory regimes, fiscal and monetary policy frameworks—we have seen them all become more integrated between 1980 and 2008, and more fragmented since...
  4. REDOUBLED EFFORTS TO CLARIFY “ESG”
    Environmental, social and governance (ESG) investing became politicized in 2022—and even a new front in the “culture wars”—and to counter this, we believe more clarity is needed on the distinction between investing processes and investing outcomes…

FIXED INCOME: THE RETURN OF MARKET DISCIPLINE

  1. PERSISTENT INFLATION SUGGESTS PERSISTENT BOND MARKET VIGILANCE
    We enter 2023 with high inflation and extreme levels of government debt. Against this background, we see bond investors standing up more strongly for their interests against policymakers and punishing policy inconsistencies…
  2. ABILITY TO ABSORB HIGHER RATES LIKELY TO DOMINATE CREDIT
    Floating-rate borrowers will need to adjust right away, but because we see structurally higher rates ahead, we think fixed-rate borrowers will eventually need to adjust, too. In our view, the sooner investors work higher-rates-for-longer into their credit analyses, the better…

EQUITIES: WINNERS AND LOSERS

  1. EARNINGS ESTIMATES RECALIBRATE AND FAVOR THE FITTEST
    We think earnings estimates are likely to be revised down. We also think dispersion in earnings estimates will increase, as companies that are less exposed to labor and commodity costs and have more pricing power are better able to maintain margins…
  2. MANAGEMENT TEAMS RE-FOCUS ON SHAREHOLDER VALUE
    When equity investors demand higher risk premia and bond yields present a meaningfully higher return hurdle, one way for company management teams to keep the cost of capital down is to re-focus on seeking to deliver tangible, near-term shareholder value …

ALTERNATIVES: CHALLENGES AHEAD, BUT OPPORTUNITIES FOR THE NIMBLE

  1. MORE DISPERSION IN PRIVATE MARKETS PERFORMANCE
    Private equity and debt funds, and their underlying portfolio companies, won’t be impervious to the ongoing slowdown. Such a challenging environment is likely to result in performance dispersion that tends to favor higher quality companies, management teams and growth plans…
  2. A GROWING OPPORTUNITY SET FOR OPPORTUNISTIC INVESTORS
    Market downturns tend to be favorable for providers of liquidity over holders of assets. Liquidity providers can be selective across liquid and illiquid alternatives and niche opportunistic strategies as valuations decline—or even dislocate…
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