“Caution remains the watchword” for investors in a rapidly-evolving market environment, according to senior investment managers.
Elevated inflation, higher interest rates and a global recession were expected to weigh on market conditions over the course of 2023.
Chris Wallis, chief investment officer at Vaughan Nelson Investment Management, said the market would have to digest the reduced earnings expectations which would likely occur in the first half of 2023.
The combination of tighter financial conditions and expiring monetary and fiscal stimulus could lead to an earnings and economic recession and inflationary pressures begin to accelerate, he said.
Meanwhile, Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions said he expected three key themes to underpin market movements in 2023.
1. The structural equilibrium for inflation in the United States
If inflation remained “well above” the 2% target range, the US Federal Reserve would likely tighten interest rates further than currently anticipated.
“A more hawkish Fed certainly won’t help restore dampened risk appetite across the globe,” he observed.
2. Company earnings trajectory
According to Janasiewicz, the market was currently split into two binary outcomes for company earnings — remaining largely unchanged by year end or down another 10%-15%.
But he expected earnings to withstand market volatility.
“Corporates are aggressively cutting costs to preserve margins. With cost pressures easing and demand proving resilient might that be the missing piece to the earnings puzzle that leads to a better-than-expected Earnings Per Share outcome?” he observed.
3. Monetary policy divergence
Finally, Janasiewicz expected global central banks to pursue diverging monetary policy strategies in response to differing regional challenges.
“The end of the Fed tightening cycle appears within reach while the European Central Bank remains several quarters behind, having just recently adopted the Federal Reserve’s playbook,” he said.
“Heading into 2023, growth momentum appears to be inflecting higher in the US while incremental downside risks appear to be building further in Europe.”
Across emerging markets (EM), central banks had been the first to tighten and could be the first to ease interest rates as inflationary pressures abated and growth slowed.
“Nuance will matter again in 2023 after a year that was one big one-way rates trade,” Janasiewicz concluded.
