UBS Global Wealth Management’s Chief Investment Office has published its Year Ahead 2023 report, outlining what investors should expect as one of the most challenging years in history for markets draws to a close.
According to the report, the investment backdrop should become more constructive as 2023 evolves, inflation falls and investors start to anticipate rate cuts and higher growth.
But as we enter 2023, high inflation, rising rates and slowing growth expectations favour a relatively defensive stance on risky assets.
Key recommendations for the year ahead
• Add defensives and value Defensive sectors should prove relatively insulated from a weakening economy, while value stocks tend to perform well when inflation is high. More attractive opportunities to
buy cyclical and growth stocks may emerge later in the year, as inflation slows and global growth picks up.
• Seek income opportunities Earning more predictable returns from income strategies is appealing against an uncertain backdrop, while high market volatility itself can also offer a means of generating
income. Once rates and growth stabilise, elevated yields among lower-rated issuers could present an attractive opportunity.
• Shelter in safe havens Relatively high US rates and slowing global growth should help keep the US dollar strong in the coming months, and the Swiss franc’s safe-haven appeal is likely to attract inflows. But investors will need to prepare for greenback weakness as Fed policy is expected to turn more dovish.
• Seek uncorrelated hedge fund strategies Macro, low net equity-long short, and multi-strategy funds can help diversify portfolios in the context of periodically elevated equity-bond correlations, which are likely to persist as swings in monetary policy are expected to continue driving markets.
Mark Haefele (pictured), Chief Investment Officer at UBS Global Wealth Management, said: “We see a year of inflections ahead. Investors currently sheltering from volatility need to plan when, and how, to rotate back into recovery themes in 2023.
"Over the longer term, we see private markets as a way to grow exposure to secular trends of the decade ahead, notably in the areas of digitalisation and energy security.”
Decade of transformation
The decade of transformation has already brought significant changes to the global economic, political, societal and environmental picture, says the report.
But with central banks determined to bring inflation under control, a transition to green energy spurring investment, the era of security driving public spending on infrastructure and R&D, and the digitalisation of business models gaining momentum – all amid lower asset class valuations – a more positive secular backdrop remains possible.
Investment opportunities to capture value and growth in the decade ahead include:
• Position for the 'era of security' Prioritisation of energy security, food security and technological security by governments and businesses will be a key driver of major sectors in the years ahead. Efforts to improve efficiency across the broader food supply chain, for example, are expected to drive opportunities in several areas. Smart agriculture is expected to cumulatively see its market size expand by 11% a year until 2030 from an estimated $13bn today.
• Invest sustainably Despite underperformance in the past year, long-term performance of sustainable investments remains strong on an absolute and relative basis and sustainability can be a key driver of corporate performance. However, investors need to pay particular attention to diversification by sector, style and asset class.
• Find value in private markets Private market investments not only help with portfolio diversification, but putting fresh capital to work in private markets in the years following declines in public markets has historically proven a rewarding strategy over the long term. Strategies that can take advantage of price dislocations are a compelling option for investors looking to build up their exposure to the asset class.
To view the full report, with an exploration of various economic scenarios, click here