Eyes on the horizon as turmoil turns to hope: A view of the markets for 2023

Johannesburg, 31 January 2023 – Off the back of a tumultuous year for investors, 2023 is set to be one that marks the dawn of a new global market regime, requiring a new investment playbook. The following outlook is provided by Discovery Invest and its partners, Ninety-One, BlackRock, and Goldman Sachs (GSAM) – world leaders in asset management.

The consensus among them converges on the view that a decade-long ‘Great Moderation’[1] – characterised by largely stable inflation, low interest rates, minimal volatility, and steady growth – has placed the global economy at an inflection point[2], and made way for a time of culmination[3] to reap from consistently investing during this more favourable period.

Discovery Invest’s local funds are managed by Ninety-One and since 2020, its global investment solution has given investors the opportunity to invest below the prevailing exchange rate and utilise asset allocations provided by BlackRock and GSAM.

“The world over, we are moving into a period that may be characterised by continuing market and economic volatility as well as geopolitical uncertainty as many of the world’s leading central banks reverse long-standing monetary policy,” says Discovery Invest CEO, Kenny Rabson.

“A period of slower growth among some of the world’s major developed economies may be imminent, despite an optimistic start to 2023. Fortunately, inflation, which is the primary culprit of the changing environment, should be brought largely under control, while much of the economic damage caused in the process may already have been priced into equity markets.

It is critical for investors to hold a long-term view, even as they consider a new investment playbook given this backdrop,” he adds.

The Year that Was

Looking back, the 2022 Discovery Invest Market Outlook[4] cautioned that the year would be one characterised by rising inflation across the globe as persistent supply bottlenecks (caused by the global Coronavirus pandemic) met rising energy prices, pent-up consumer demand, and the loose monetary policies of the West.

While analysts expected central banks to respond by normalising policy through gradual interest rate hikes, repeated inflation surprises, exacerbated by the Russian invasion of Ukraine, saw the pace and extent of this monetary tightening exceed levels not seen in the US since the 1980s.

In its 2023 Outlook[5] Ninety-One summarised: “As a function of an inflation shock occurring at a time when bonds had been pushed to severely overvalued levels by ultra-loose central-bank policies, equities and fixed income declined together to a degree not witnessed since 1969.”

Following a year of double-digit gains on US markets, the S&P 500, which tracks the performance of the largest 500 companies on US stock exchanges, recorded a 19,4% drop - its worst year since the global financial crisis of 2008.

Similarly, the MSCI Europe Index, which captures large and mid-cap representations across Europe, was down 16,5% for the year, effectively erasing its 16,9% gains of 2022; the MSCI World Index, which captures representation in 23 developed market countries, declined 17,7% and the MSCI Emerging Markets Index fell by 19,7% in USD terms.

In South Africa, the situation was less severe, with the FTSE/JSE All Share Index up 3,6% for the year, following a dramatic 15,2% rally in the final quarter of 2022.

While most markets, especially in the emerging world, rebounded from their 2022 lows in the final quarter of the year and performed well in the opening weeks of this year, 2023 may still be a year in which markets face significant headwinds.

Despite the recent rally, Ninety-One is of the view that there might be “quite a material slowdown,” said Chris Freund, co-Head of SA Equity & Multi-Asset in a podcast[6] released in January. “We don’t really buy, at this stage. We still think that there is some weakness coming.”

The Year Ahead

As central banks continued to wage war on inflation by ‘overtightening’ policy and bringing an end to the era of ‘super loose’ monetary policy, a 2023 recession for as much as a third of the world’s developed economies had been widely predicted by the end of 2022.

The economic damage caused by the policy response of central banks has placed pricing the damage of this economic downturn, as well as an evaluation of market risk sentiment, as key investment themes at BlackRock.

“The good news this year is that inflation should come down a long way,” said Alex Brazier, Deputy Head of the BlackRock Investment Institute, and co-author of its 2023 market outlook, during a Media Roundtable held in December.

“Energy prices have stabilized, and as central banks create these recessions to close the gap between the level of activity in their economies and what those economies can comfortably sustain, we should see core inflation come down.”

However, BlackRock expects the world to be living with inflation at levels that are higher than markets had been pricing by the end of 2022, as three long-term trends: aging populations, geopolitical fragmentation, and the transition to a lower-carbon world keep the growth of prices at above pre-pandemic levels.

By the end of 2022, BlackRock was underweight developed market equities, and neutral emerging market equities but expects to turn more positive on risk assets at some point during the year.

However, when they do: “we don't think that it is a prelude to a decade-long bull market that we have seen in the past,” said Wei Li, the Global Chief Investment Strategist, BlackRock Investment Institute.

Chris Freund concurs but appears more optimistic. He suggests equity markets may turn more positive towards the end of the year and believes “the market is going to start to anticipate or discount the economic upswing of 2024 and that could lead (I think it is going to lead) to a very, very strong equity market towards the end of this year”.

As BlackRock begins rethinking bonds, investors that have been long starved of fixed-income returns in a low-interest rate environment may stand to benefit from exposure to short-term government bonds, investment-grade credit, and agency mortgage-backed securities.

After being rendered un-investible since the Global Financial Crisis, “government bonds are once more investible in several developed markets,” agrees Ninety-One.

Eyes on the Horizon: thinking long-term

“For longer-term investors, periods of culmination present opportunities to acquire assets at good prices. Investor positioning is thoroughly cleansed; excesses are exposed; and positive risk asymmetry - where potential upside outweighs potential downside - is restored. 2023 could prove to be one such occasion,” says Ninety-One.

“For investors, we believe seizing the opportunities these changes may create while bolstering portfolios against market turbulence calls for a new approach rooted in a more holistic view of asset allocation with increased attention to risk,” suggests Goldman Sachs.

“The new regime requires a new investment playbook. It involves more frequent portfolio changes by balancing views on risk appetite with estimates of how markets are pricing in economic damage. It also calls for taking more granular views by focusing on sectors, regions, and sub-asset classes, rather than on broad exposures,” says BlackRock.

“Given the change, uncertainty and the dispersion of opportunity, active management through partnerships with the world’s best asset managers and a long-term investment mindset remain key for the year ahead,” concludes Rabson.

ENDS