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

2023 is set to be a year that marks the dawn of a new global market regime as interest rate hikes slow developed market economies, creating headwinds that may subdue corporate earnings.

However, the outlook for most asset classes has improved significantly as compared to 2022, and some cautious hope for a year end rally remains.

This is according to the market outlooks from Discovery Invest and its partners, Ninety One, BlackRock and Goldman Sachs (GSAM) - world leaders in asset management.

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

Looking back on 2022

Looking back, the 2022 Discovery Invest Market Outlook cautioned that the year would be characterised by rising inflation across the globe. This as persistent supply bottlenecks (caused by the global COVID-19 pandemic) met rising energy prices, pent-up consumer demand and the loose monetary policies of the west.

Analysts expected central banks to respond by normalising policy through gradual interest rate hikes. However, 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 United States of America since the 1980s.

As a result, both equities and bonds declined to a degree not seen in decades.

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. Even so, it is likely too early to call a return to a bull market for developed equities.

Discovery's partners agree that a decades-long period of largely stable inflation, low interest rates, minimal volatility and steady growth has come to an end.

"The world over, we are moving into a period that may be characterised by continuing market and economic volatility, as well as geo political 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.

What 2023 may have in store

By the end of 2022 a recession for as much as a third of the world's developed economies had been widely predicted by asset managers, global bodies and central banks.

The economic damage caused by the policy response of central banks to combat rising inflation has placed the following as key to market performance for 2023:

• Pricing the damage of this economic downturn.
• An evaluation of market risk sentiment.

"The good news this year is that inflation should come down a long way," said Alex Brazier, Deputy Head of the BlackRock Investment Institute, during a Media Roundtable held in December. He's also co-author of BlackRock Investment Institute's 2023 market outlook and has shared more insights on inflation.

"Energy prices have stabilised, 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 that the world will be living with inflation at levels that are higher than markets had been pricing by the end of 2022. This because 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.

Despite concerns, and assuming no shocks, the year holds the potential for a period of strong growth towards the end of 2023 as markets begin to anticipate a return to a growth cycle for global equities in 2024. BlackRock had started the year underweight in equities but expected to turn positive towards the end of the year.

Chris Freund, Co-Head of SA Equity & Multi-Asset at Ninety One appears even more optimistic.

"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," he said during a podcast in January.

However, as the year requires a new investment playbook to take advantage of all that is on offer, investors may need to rethink their strategies going forward.

"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.