The 6 themes that will influence the market in 2023

Despite the global political and economic uncertainty that 2022 has left us with, the world economy continues to show signs of recovery, attracting investors to new opportunities. In 2023, investors must be prepared to embrace and take advantage of these changes to maximize their investment opportunities.

Against this backdrop, Jonathan W. Hubbard, Managing Director, Benoit Anne, Director, and Jamie Coleman, Senior Strategist, all of MFS Investment Solutions Group, identify opportunities and risks that will influence the macroeconomic and capital markets environment in the year ahead.

1. Central Banks take a break

Experts comment that 2023 will be a year of change in monetary policy, as most central banks will begin the end of their tightening cycles.

"It may be that the end of the Fed's tightening cycle will be an important turning point for global markets. Risk appetite has been low in recent months, but this may change during the first half of the year as central banks, including the Fed, signal that they will pause. Similarly, we believe the upside potential for rates is now more limited, which has positive implications for fixed income," they detail.

2. Carrying yields

Hubbard, Anne, and Coleman, on the other hand, argue that from a strategic perspective, "higher yields offer attractive opportunities as entry points into fixed income given the close correlation between initial rates and subsequent returns".

In this regard, they specify that the same applies to developed market government bonds, which are lower risk, as well as to the riskier sub-sectors of global carry yields, such as high yield, which currently offer yields of 8-9%.

In summary, they indicate that it would be optimal to overweight fixed-income allocations in multi-asset portfolios and to consider multi-asset portfolios and consider adding exposure to higher-quality credit.

3. Beware of contagion in private markets

Experts also warn of the risk of contagion from private to public markets. "The opacity and interconnectedness of private markets make it difficult to gauge their relationship with public markets in the absence of robust and accurate data. And, when markets are fearful and lack information, they tend to put on their worst," they note.

They detail that while the banking system is now in much better shape than it was in the run-up to the global financial crisis, "the increased importance of unregulated non-bank lenders over the past decade is a cause for concern. In particular, in the event of a contraction, the leveraged loan market, estimated to be worth $1.2 trillion, could have a significant ripple effect on markets and the economy," they acknowledge.

That said, they recommend re-evaluating private market positions and exposures and considering de-risking private positions, especially those with limited liquidity, given more attractive valuations in both public equity and fixed-income markets.

4. Changes in supply chains could underpin inflation

Under the current scenario, experts argue that the reorientation of supply chains can have a double result: improving resilience and depriving rival countries of strategic goods and technologies.

They also point out that there could be a combination of strategies:

However, they warn that reorienting international supply chains will not be cheap; "it could squeeze profit margins and further boost inflation. However, this could result in the reindustrialization of the United States and its closest trading partners, and could possibly benefit small and mid-cap companies," they say.

5. The decline in inflation normalizes correlations

MFS indicates that it is unclear whether inflation has peaked. However, the experts point out that in view of the aggressiveness of central bank tightening and the significantly higher levels of core rates against which year-on-year inflation will be determined, "it seems likely that prices will continue to moderate. This moderation, accompanied by a pause by central banks, may see equities and bonds regain their traditional inverse relationship."

After the dismal returns generated by their balanced portfolios, they comment that investors may be tempted to abandon the strategy. However, "higher yields offer the fixed-income component better protection during downturns, while equities prove a more attractive entry point for long-term investors," they note.

6. Huge cryptocurrency problems force authorities to take action

According to the MFS report, it has been found that many of the new cryptocurrency providers were related to each other through loans, cross-ownership, and trading agreements.

This is in addition to the collapse of cryptocurrencies last year, which caused many investors to go bankrupt. Given this, experts believe that regulators will now have to be more demanding, or new regulations will have to be created for this sector.

"The value proposition of cryptocurrencies remains unclear, they are incapable of generating cash flows and have minimal real-world applications. Most investors would do well to keep cryptocurrencies away from their portfolios. In addition, to quickly resolve jurisdictional issues, the SEC and CFTC will need to get on the same page with their counterparts around the world," they say.