Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the most prominent themes currently influencing markets, with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers. We talked about the impact on equities, commodities and fixed income. And we started by asking him to describe the current state of the market.

Lenny McLoughlin (LM): The main issues which drove markets last year are still likely to dominate the outlook, we think, in 2023. And those issues really were centered around four things: inflation, central bank policy, economic and earnings growth, and geopolitical issues. Now the good news is that inflation appears to be peaking. The offset to that easing in goods price inflation is services inflation. It remains high. And when it rises, historically it tends to be quite sticky. On the growth front, we have seen forecasts revised down sharply at the start of the year. Fears of a possible global recession in 2023 have grown. However, there are some offsets to those fears, and they centre around, particularly the reopening of the Chinese economy, post the abandonment of their zero tolerance Covid policy. But also, across Europe, what we’re seeing is better sentiment, with better activity readings coming through the last number of weeks and months. And that is suggesting that Europe may be able to avoid the recession. In terms of whether the U.S. economy and the global economy will enter recession this year, the jury is still out. But there are increasing hopes that we will achieve a soft landing. Even if a recession were to occur this year, we think it could be relatively short and shallow.

Opportunities in fixed income

LM: Where we see the most immediate opportunities in markets, are in the fixed-income space. Over the course of 2022, what we saw was that yields across bond markets rose to multi-year highs. We believe bond markets are now fully discounting that higher inflation backdrop and that tightening of monetary policy by central banks. Yields have risen to attractive levels. We think fixed-income assets will now begin to provide protection again for multi-asset portfolios. Within the fixed-income space, our preferred areas are EM local debt and EM hard debt, where yields offer a strong carry. Investment grade corporate bonds globally are representing an opportunity as well. Sovereign bonds also offer quite attractive levels of yields in absolute terms. But we also believe there is scope for yields to fall over the course of 2023, which offers you a combination of both income stream but also capital returns.

The outlook for equity markets

LM: While we think there is upside in equity markets over the course of 2023, we think they are vulnerable to some short-term downside, mainly linked to the risk around earnings forecasts. In the case of equity markets, they seem to have fully discounted the rising yields that we saw over the course of 2022, and, again, that aggressive tightening that we saw from central banks. However, there is a possibility that maybe equity markets haven’t fully factored in the lingering growth and earnings uncertainty that’s out there at the moment. And we think those two issues could actually lead to some further short-term downside in equity markets which then would represent a better buying opportunity. Equities are forward-looking and they do discount ahead. What you typically see is that at the early stages of a new investment cycle, equities tend to generate very, very strong returns. So, even though there is potential downside in equity markets in the short term, we see recovery in equities over the course of the year.

How commodities look

LM: On the commodity side of things, there are two opposable forces that will impact market prices this year. On the positive side, you’ve got China reopening. That recovery in the Chinese economy this year should be positive. And then on the other side of that, you have the risk of slower growth in the short term in some developed markets, with the possibility of a recession. And that could or would lead to lower levels of demand for commodities. So, two offsetting forces there. However, we think for the year as a whole, commodity prices will show positive returns.

Where rates may go

LM: There is some speculation in the market that central banks could begin to cut interest rates through the second half of the year. Our own view is that the Fed and other central banks may be reluctant to reduce official rates through the second half of this year, as they’re fearful of easing policy too early like they did back in the 1970s, and not actually being able to rid inflation from the system. And we think when they do raise rates to their peak levels in the first couple months of this year, we think those rates will be maintained over the course of 2023.

And, finally, what should the savvy investor keep in mind?

LM: The savvy investors should always consider the long term, and not be too concerned over the short term. We do get volatility in markets from time to time. But we continue to expect to see strong returns and investors should take advantages of the dislocations that we’ve seen over the course of 2022.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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