• Near-term recession is too close to call. However, lower inflation and slower growth over the next few years seem very likely.
  
  
• After a dreadful year, return prospects for bonds in 2023 look much better as the Fed concludes its rate hiking cycle. Investors can take advantage of higher yields in short-dated bonds while adding duration as a hedge against market volatility and maintaining a high quality bias in credit.
  
  
• Globally, 2023 should see substantial (albeit incomplete) normalization in inflation levels, a pause in central bank hikes and a hangover for the real economy from last year’s inflation surge and aggressive rate hikes. China may be an exception to the rule of global deceleration, with a slow (but bumpy) shift away from “Zero COVID”.
  
  
• U.S. equity returns will be driven by earnings against a backdrop characterized by elevated market volatility. In this environment, companies with pricing power and stable cash flows - that are trading at reasonable valuations - are most attractive. 

• While risks around the international growth outlook are high for 2023, they are also much better reflected in equity valuations (and currencies) – and “less bad” news can be enough to fuel a powerful rebound once the worst is priced into earnings expectations.
  
  
• Alternatives have benefitted from an environment of easy money for the past decade - a trend that has come to an end. The new combination of higher rates and demand for capital will allow for more differentiation between winners and losers.
  
  
• ESG was confronted with headwinds in 2022, yet commitments from policymakers this year could fuel investments in sustainable technology and infrastructure for the next decade.
  
  
• Despite uncertainty on the horizon, significant valuation imbalances across markets mean there is more upside potential than downside risk in investing today.

U.S. economy

2022 turned out to be another very difficult year.  Widespread vaccination and less lethal strains of Covid-19 led to lower fatality rates, allowing most pandemic-weary populations around the world to move back towards normal activity.  

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International economy

For the global economy in 2022, it all began and ended with inflation (with China the exception). The year’s biggest surprise was how high inflation got, how persistently it remained elevated and how diversified inflationary pressures were by items and countries. 

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U.S. equities

2022 was a year characterized by extreme capital market volatility. Uncertainty around the trajectory of inflation led interest rates to rise sharply, undermining equity market valuations that had been sitting well-above long-term averages. 

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Fixed income

Fixed income investors will be happy to close the book on 2022 after one of the worst years on record for bonds driven by the Fed’s most aggressive rate hiking campaign since the 1980 Volcker-era tightening.

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International equity markets

While 2023 may see the storm hit the real economy, 2022 was the year the storm was felt in financial markets, including international equities (with the MSCI All Country World Index ex-U.S. down 15% in U.S. dollars). Will the sun shine brighter in 2023?

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Alternatives

Public markets sold off aggressively in 2022, but private market valuations have been slower to adjust. This has left many investors over-allocated to alternatives and wondering when asset values will be written down. 

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Asset allocation

Looking forward to 2023, investors will continue to face a difficult and confusing environment, including the lingering impacts of COVID-19, the war in Ukraine and fears of fading inflation transitioning to concerns about recession.

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ESG

Headwinds materialized in 2022 for ESG investing. The war in Ukraine caused energy prices to surge and energy stocks to soar; weapons and defensive spending became crucial to war efforts.

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