Macquarie Asset Management

Outlook 2023: Opportunity in a volatile world

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Events over the past 12 months have only heightened our conviction that the underlying dynamics at play in the global economy have changed in profound ways.

Behaviours and outcomes that had guided investors since the 1990s no longer apply.

A new era dawns

We are entering a new macroeconomic regime as growth in the supply side of the global economy downshifts.

Expect a recovery in 2H23

The developed world will likely be in recession in early 2023, but we expect a recovery in the second half of the year.

Energy transition continues

Energy security and cost concerns are on the rise, but this should accelerate the energy transition.


Globally, labour productivity has slowed over time

Source: Macrobond (November 2022).

A new era dawns

Supply isn't everything, but over the medium term it is almost everything

Supply pressures should continue to ease in the near term and inflation is likely to moderate. But from a long-term perspective, growth in the supply side of the global economy has slowed down, which means the next economic cycle will be characterised by higher interest rates, greater underlying inflationary pressure, more stop-start gross domestic product (GDP) growth, and less countercyclical policy support for economies and asset prices.

 


Recessions often follow sharp increases in interest rates

Source: Macrobond (November 2022).

Expect a recovery in 2H23

Recessions are coming, but so are recoveries

With inflation eroding real incomes and interest rates rising sharply, recessions are likely in early 2023. But the US, UK, and European economies should all be recovering in the second half of the year. With China likely to accelerate steadily through the year as policy easing steps up a gear, the global economic landscape should be much improved towards the end of 2023.

 


Renewables will continue to become more cost efficient1

     Source: BloombergNEF (November 2022).

  1. On a levelized cost of electricity (LCOE) basis, where renewables are the average of solar and onshore wind and fossil fuels are the average of coal and gas.

Energy transition continues

A renewables-based electricity system may be both cheaper and more secure than a fossil fuels-based system

The global energy crisis has brought concerns about energy security and cost to the fore for consumers, businesses and governments alike. A renewables-based energy system is likely to be both more secure and cheaper than a fossil fuels-based system, so recent developments should ultimately accelerate the transition to a low-carbon energy system.

 

Looking for an easy way to understand our views on the markets for 2023?

Read Ben Way's letter to investors.

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The global economy faces diverse and complex challenges, but we can play a key role in presenting opportunities to our clients that will generate positive impact for everyone.”

Ben Way
Group Head, Macquarie Asset Management

Asset class viewpoints

For 2023, we are most positive on infrastructure, fixed income, and agriculture. All three asset classes offer yield and defensiveness, while infrastructure and agriculture also provide a hedge against high inflation. Global listed equities and real estate face more headwinds in the near term, but there are still thematic opportunities in both asset classes, and cyclical opportunities should emerge in early 2023 as the downturns unfold and then morph into recoveries.

Debt markets

With interest rate expectations peaking out, inflation likely to moderate, and the major developed world economies set to enter recession, 2023 should be a good year for debt markets. High-quality sovereigns are our favoured exposure and duration looks attractive. Some caution is warranted for credit and select emerging markets as recessionary conditions could see risk spreads rise in some areas.

Equity markets

The derating sell-off is mostly behind us, in our view. But earnings could now come under pressure as revenue growth slows in line with the deterioration in global growth in the first half of 2023. But if onshoring continues, as we expect, the beneficiaries will likely be construction and engineering firms, railroads, and consumer discretionary firms. If inflation falls, this would provide an additional boost to consumer-exposed corporates. If it doesn’t, highly levered firms and those in regulated industries could be negatively affected.

Real assets

Infrastructure is a standout. It offers inflation protection, defensiveness, high yield, and exposure to structural growth drivers, all of which should be attractive to investors in 2023. Agriculture, with its inflation hedge characteristics and consistent return delivery, also looks attractive to us. The rise in interest rates globally means the near-term outlook for real estate is more challenging. High-quality buildings with healthy cash flows and premium tenants, and assets in attractive locations where there are demand-supply imbalances, should continue to perform solidly.

On demand –

Outlook 2023 webinar

Our panelists discuss the key themes investors should be prepared for to navigate the markets in 2023.

Contributors

Ben Way – Group Head, Macquarie Asset Management
Daniel McCormack – Head of Thought Leadership
John Leonard – Global Head of Equities
Brett Lewthwaite – Chief Investment Officer, Global Head of Fixed Income
Graham McDevitt – Global Fixed Income Strategist
Patrick Er – Senior Econometrician
David Roberts – Global Real Estate Strategist
Aizhan Meldebek – Global Infrastructure Strategist

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