From a regional bank crisis to default fears, the first five months of 2023 has been anything but quiet. As we head into the second half of the year, we take a look at key themes that could affect risk markets and investment returns.
A very busy six months
The first half of 2023 may have felt challenging, but itâs fair to say that the global economy and financial markets have shown to be more resilient than expected. Generally speaking, stocks and the fixed-income market have delivered positive returns year to date.1
While breadth of the positive performance in the stock market isnât as broad as we would have likedâfor instance, small caps and parts of the emerging-market universe didnât do too wellâtechnology stocks managed to carve out some respectable gains after a horrible 2022.
On the fixed-income side of the equation, weâve seen positive returns in government-backed and credit securities. Those returns may seem modest, but they do represent a sharp improvement from what we saw in 2022.
Looking ahead, we find ourselves focusing on three key themes from an asset allocation perspective.
1 Dial down the focus on inflation, worry more about growth
The battle against inflation isnât over, but itâs time to cast our gaze further afield and focus on growthâspecifically, the effect that sticky inflation and cumulative rate hikes can have on growth. The lagged effects of central bank monetary tightening are finally becoming more observable, and itâs becoming clear that theyâre starting to bite into growth dynamics. While the economy has been fairly resilient, we think it isnât enough to avert a recession in parts of the world.
That said, it must be noted that weâre less worried about how deep the expected recession could be than we are about how long it will last. Itâs possible that we could be stuck in a slow-growth environment for a prolonged periodâa scenario that isnât reflected in current pricing of market securities.
Asset class overview
Source: Multi-asset solutions team, Manulife Investment Management, as of June 22, 2023. For more information, please refer to the important disclosures at the end of this page.
Broad equity
Source: Multi-asset solutions team, Manulife Investment Management, as of June 22, 2023. For more information, please refer to the important disclosures at the end of this page.
Regional/sector-specific equity
Source: Multi-asset solutions team, Manulife Investment Management, as of June 22, 2023. For more information, please refer to the important disclosures at the end of this page.
Fixed income
Source: Multi-asset solutions team, Manulife Investment Management, as of June 22, 2023. For more information, please refer to the important disclosures at the end of this page.
2 Certainty about rising uncertainty
Investors should get used to heightened uncertainty because itâs unlikely to go anywhere anytime soon. In addition to ongoing uncertainty around central bank policy, markets will also need to constantly adjust to the ever-evolving global geopolitical backdrop. Crucially, markets seem to have a fairly rosy view of corporate earnings, which seems somewhat optimisticâin our viewârelative to what fundamentals suggest. In such an environment, we believe it makes sense to focus on higher-quality assets and adopt a more defensive positioning.
3 An improvement in long-term return prospects
Our analysis indicates that the longer-term return prospects for equities and fixed-income assets look healthy once weâve returned to a growth environment, which is particularly true for fixed-income assets.
On the back of the sizable reset in interest rates across the globe, the return prospects for fixed-income instruments now look much better over a 5- to 10-year forecast horizon relative to where they were just two years ago. As active managers, weâve been able to identify interesting opportunities within the fixed-income complex.
Broadly speaking, stock valuations have fallen from their recent peak; however, the repricing that equities went through wasnât as severe as their fixed-income peers. Relatively speaking, while there are opportunities to be found within the equities space, we find fixed income more attractive at this juncture. Investors can expect fixed-income instruments to continue to provide a return in a low-growth environment; the same canât be said of equities, as a protracted period of anemic growth typically translates into headwinds for this asset class.
âCrucially, markets seem to have a fairly rosy view of corporate earnings, which seems somewhat optimisticâin our viewârelative to what fundamentals suggest.â
Looking beyond short-term challenges
In a time in which instant gratification has become the default setting, it can be difficult to battle short-termism; investing, however, requires us all to discard the instinct to assess everything through the prism of nowâitâs a longer-term commitment. Things should improve once we get past the imminent low-growth environment and likely recession. For the next 6 to 12 months, adopting a more defensive posture with a keen focus on quality could make the most sense, particularly within the context of rising uncertainty.
1Â As of 6/13/2023.
Model inputs are factors in Manulife Investment Management research and are not meant as predictions for any particular asset class, mutual fund, or investment vehicle. To initiate the investment process, the multi-asset solutions team formulates five-year, forward-looking risk and return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight; assumptions are then adjusted for economic cycles and growth trend rates. The charts shown here may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and are only as current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different from that shown here.
The information in this material, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly in an index. Past performance does not guarantee future results.
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