Throw out the old rule book
2023 investing-saying goodbye to 2022 isn’t too hard for most investors, as the once-ascending stock market came crashing down to eliminate much of the previous years’ growth. Post-pandemic supply chain disruption, workforce deflation, economic inflation, supply shortages, and climate disasters have shaken up the relatively safe and familiar investment models.
Professional fund managers have had to stretch their usual tactics to encompass an investment market where high, and climbing, interest rates replace the steadfastly low rates of recent decades. Additionally, the stocks/bonds relationship has been disrupted and world events have driven deep cracks into foundational processes.
The challenge for investors is to recognize more potential influences on models of predicted market performance, and position themselves to quickly respond to new events.
One of the world’s largest fund managers, BlackRock, is presenting their new strategies for 2023 through their BlackRock Investment Institute 2023 Global Outlook, A new investment playbook. This group is going forward with the idea that the sustained bull markets of the past are over and there is no ‘going back to how things were.’
In their analysis, they include three main themes for 2023 investing : pricing the damage; rethinking bonds; and living with inflation.
Pricing the damage
The Institute says that the ultimate economic damage we’ll experience depends on how far central banks go to get inflation down. Banks are continuing to raise interest rates to try to dampen consumer spending and ultimately lower inflation to their goal of 2 percent. With this tactic, they are actually causing an upcoming recession.
How much of the potential economic damage – especially to equity earnings – is already reflected in market pricing? The analysts believe that current market pricing does not factor in even a mild future recession.
The 2023 investing strategy calls for a continuous reassessment of how much of the economic damage being generated by central banks is reflected in the market prices. When valuations reflect actual economic damage, and not just responses to the hopes of better times, then equities may be worth the risk.
Until now, long-term government bonds have been used to shield investment portfolios from inflation; but now those bond returns have gone down along with stocks. Going forward, those long-term bonds are unlikely to return to their traditional place in portfolios because of long-term inflation. Investors will want higher returns during the central bank-tightening policies. For this reason, short-term bonds, highgrade credit, and mortgage-backed securities are more attractive, providing higher yields to investors looking for income.
Living with inflation
Inflation is not predicted to stay as high as it is right now, but it won’t stabilize at the central bank’s target of 2%, either. The report authors believe that we’ll see an economic recession, alongside persistent inflation.
Production constraints are fueling inflation. Central banks cannot solve these constraints. That leaves them raising rates and engineering recessions to fight inflation.
The new emerging economic model is based on the pandemic shift in consumer spending from services to goods, which caused shortages and bottlenecks in production. Even as pandemic influences play a lesser role, long-term production constraints will affect long-term inflation.
The drivers of production constraints are seen as aging populations, geopolitical fragmentation, and the transition to a lower-carbon world. Many economies will continue to experience worker shortages as their populations age out of the workforce. Supply chains will be affected by countries’ self-protecting and/or aggressive agendas. And, as governments try to retool to reduce carbon outputs, resource allocation could generate disruptions and shortages among existing needs.
As we move to 2023 investing, flexibility and the ability to respond to changing markets will be essential. Don’t expect to return to ‘business as usual’. Be prepared for higher interest rates for years, not months. Expect changes to much of the advice of the past.
- Bonds: Say Hello to an Old Friend
- Investing in Bonds 2023
- Bank of England: We Will Raise Interest Rates Again
- UK Inflation Flips in Surprise Reversal Upward
- Navigating Q4 Investments in the Wake of Soaring Inflation
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