The speed and aggressiveness of central bank hikes is concerning State Street Global Advisors (SSGA) as it believes the world is on the brink of overtightening.
There were multiple factors impacting markets currently including the war in Ukraine, European energy supplies and the COVID-19 impact on supply chains and migration.
SSGA said it believed 2023 would not be a straight path and forecast global growth to be 2.6% in 2023, a figure it said was “meaningfully below trend”.
It said: “We expect market uncertainty and volatility to persist for some time, leading to a bumpy journey ahead with a wide range of possible outcomes.
“We anticipate more clarity will be achieved in 2023 as we see rates peak in much of the developed world, but what follows is anything but clear. 2023 will not be a straight path.
“Caution is warranted given the potential for both persistent inflation and overtightening by central banks.”
Inflation was high during 2022, reaching a 40-year high of 8.2% in the US, but SSGA said if inflation moderated this year then the Federal Reserve may have the capacity to implement rate cuts in Q4 2023.
With volatility on the horizon, SSGA suggested investors needed to consider the defensive allocations in their portfolio in order to withstand market disruption.
Altaf Kassam, EMEA head of investment strategy and research, said: “We believe that the ‘Great Moderation’ period is over, with central banks less likely to backstop markets as they fight inflation and look to reduce their balance sheets.
“The ‘new normal’ higher-volatility environment should still provide opportunities for equity investors, but it will also likely feature deeper drawdowns and shallower recoveries. Actively managing the risk of the current environment will require effective downside protection strategies.”
