2023 investment outlook

Key takeaways

• We believe a short and shallow recession is likely this year, with the UK and Europe in a worse position than the US.
• We expect inflation will stay higher for longer – rates will have to move higher than markets expect.
• We see the now infamous UK mini-budget as having long-term consequences, signalling a shift for the industry, more stringent regulations around liability-driven investments (LDI), and a rethink of how to construct LDI strategies moving forward.

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What does this mean for our positioning in 2023?

If, as our outlook suggests, a global recession looks likely, then how are our portfolio managers grappling with this prospect? The following section canvases opinion from across the SEI investment floor—our portfolio managers consider the macro environment and use this to inform their active positioning:   

Jason Collins, Head of Global Equity

'Tentative signs of optimism have emerged in recent weeks, although we remain cautious in our equity market outlook. The pace of rate rises is slowing, and there are signs that inflation—whilst likely to remain above the 2% target for some time—is peaking. Further rate rises from here are likely, but this modest improvement in the macroeconomic outlook is supportive of equities.

Fundamentally, the macro backdrop is challenged and the risk of recession looms—although earnings growth remains positive, the pace of growth is slowing rapidly and will deteriorate further if recession does take hold. That said, we feel that much of the bad news is already priced in, and that the end of COVID-19 restrictions in China will lead to a rebound in demand that will boost growth—at least for firms exposed to emerging markets and China.  

Although much of the speculative froth has been blown off, the US market continues to look relatively expensive; emerging markets, pulled down by China’s troubles and capital outflows into higher yielding US treasuries, we believe offer the most attractive valuations. Strategically, we maintain our focus on value, momentum and quality “alpha sources”. Value remains particularly attractive, despite recent outperformance, as valuation dispersions are still very elevated and the style has positive momentum. We expect the derating/rotation out of growth stocks to continue as the era of free money has ended.’

Anthony Karaminas, Head of Global Fixed Income

‘We’re likely to see elevated fixed income volatility, which provides a fertile hunting ground for active management in 2023. We don’t yet see any indications that the Fed will cut interest rates, but markets are pricing in an expectation of a rate cut at the back end of the year—so clearly there are disparate views taking place. We believe any recession will be short and shallow, and whilst credit spreads have widened, we remain cautious, as we believe the market will continue to price in recession risk.

That said, on the margin we’ve been selectively adding to higher quality credit, such as investment grade bonds, and we have moved from under to overweight on mortgage-backed securities. We generally remain underweight rates exposure in developed markets, but overweight in some emerging markets. We want to be patient on the corporate bond risk premium, as we think there will likely be an attractive entry point this year.’

Chris Pettia, Head of Private Assets

‘2022 reflected a changed market environment for private equity, caused by several factors including higher interest rates, inflation, and economic uncertainty. On the traditional buyout side, we saw fewer deals getting done, as managers remained cautious about the future and the cost of financing deals given high interest rates. Whilst traditional buyouts have decreased, we are seeing an increase in the number of public to private transactions. The IPO window has been shut for most of 2022, and is apace with 2008 in terms of the number of private equity-backed companies exiting via an initial public offering (IPO). Companies that are recession resistant, with strong growth prospects, continue to trade at premium multiples.

As public financing decreases, private credit is expected to grow, with businesses seeking capital and investors benefiting from the floating-rate nature of these investments. Investment in sustainable energy and energy security should enhance infrastructure, whilst also providing a hedge against inflation. The real estate market is adjusting to changing tenant requirements and increased financing costs, resulting in varying returns around the world and between different property types.

Despite the current environment, we still believe the long-term benefits of private asset investing outweigh the medium-term challenges. It is times like these when it is important to remember the importance of commitment pacing and diversification across multiple vintage years.’

Questions?

Understanding what the above means for your investment portfolio can feel like a daunting task. Fortunately, our team is on hand to help. Get in touch with your client director for more information.

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