Investment Outlook – Positive but tempered return expectations

Contrasting returns

There were few places to hide in 2022. Inflation, monetary policy tightening, and geopolitical risks marked a stark contrast to the drivers of returns in 2020 and 2021; the backdrop ultimately forced a revaluation of fixed income and equity assets. From low to high inflation, and from low to high interest rates, returns suffered as markets adjusted to the new paradigm.

However, as 2022 came to a close, markets found a more stable footing. Fourth quarter (Q4) returns were significantly better than what had gone before, even if the outlook was clouded – as it still is. Inflation is high and is only just showing signs of moderating. Central banks are not likely to stop raising rates until well into the new year. More importantly, we expect recession on both sides of the Atlantic.

The modest recovery in asset prices towards the end of 2022 should not, in our view, be seen as a step towards revisiting the valuation peaks of recent years. Equity price-earnings ratios are likely to remain below their highs, and bond yields are not going back to close to zero. The kind of capital returns that investors enjoyed in the quantitative easing era are unlikely to be repeated any time soon. The current environment requires more thoughtful investment strategies than just chasing earnings growth and higher yield, irrespective of valuations or credit risk.

The inflation advantage

In a recession, cash flow from corporate assets to investors becomes challenged. Earnings growth slows as costs rise and revenues come under pressure. In credit markets, scarcer cash flows mean understanding how borrowers manage their debt liabilities is key. It seems in the early part of 2023, with macroeconomic uncertainty still running relatively high, investors are likely to retain a level of defensiveness. Volatility and ongoing periods of losses should not be ruled out.

The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.