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2023 Outlook: How Inflation, Interest Rates and Investors May Pivot

In 2023, we expect turbulence as inflation and monetary policy fears pivot to a weak global economy, but also to lower inflation and central bank pauses. Chief Investment Strategist for North America Chris Shipley takes a closer look at the year ahead.

  • Few Places to Hide in 2022
  • Stocks: A Case for Changing Investor Sentiment
  • Bonds: A Chance to Uncover Opportunity
  • Neutral for 2023

In 2023, we expect turbulence as inflation and monetary policy fears pivot to a weak global economy but also to lower inflation and central bank pauses. We see downside risk from the fundamentals but upside potential from better sentiment. Let's take a closer look at what this means for markets and our portfolio positioning.


In 2022, high and persistent inflation drove global central banks to increase interest rates by roughly 2% to 4%, the fastest pace in 4 decades. The rate hikes and ensuing interest rate volatility triggered bond losses, while equities slid on deteriorating prospects for economic growth and corporate profits, as well as the negative impact on valuation from higher rates. In the end, rising rates meant bonds failed to provide the kind of diversification benefits they have historically offered when equities fall.

For the most part, investors could only find positive returns in commodity and inflation-driven investments such as natural resources. While we see risks for the economy and corporate profits skewed to the downside, improving investor sentiment may provide support for equities in 2023. Central banks approaching a plateau in short term rates and inflation trending lower may contribute to more favorable sentiment. Further, the health of consumer, corporate, and financial institution balance sheets provide reason to believe a recession should be shallow and short-lived.

As China continues to struggle with reopening its economy, we think developed markets will outperform an emerging markets. Among real assets, we like natural resources, where we expect more persistent cash flows, tight commodity markets, stronger balance sheets, and attractive valuations to support returns. Natural resources should continue to play an important role in the portfolio, both as a hedge against inflation and a way to potentially benefit from reopening of China, but without the broader challenges overhanging emerging market sentiment.

In the bond market, we think investors will uncover more opportunities in 2023, with higher yields and corporate resiliency. In particular, we are overweight high yield bonds on attractive coupons and relatively low expected default rates, though trending higher. We are underweight investment grade bonds, as returns will be limited by what we expect to be slightly higher in persistent Treasury yields, as labor market strength supports the economy and makes the Federal Reserve hesitant to reverse course.

In light of the economic and market crosscurrents, we have a neutral position in developed market equities, as downside earnings risk and a disappointing economy are balanced against a likely improvement in sentiment as conditions trough in 2023. We acknowledge the potential for a China reopening trade to take hold. But we see the process as uneven and muddied by other structural challenges. In the meantime, our overweight to natural resources should benefit from any improvement in China's growth.

Christopher Shipley

Chief Investment Strategist – North America
Chris Shipley is chief investment strategist for North America, responsible for the strategic and tactical asset allocation policy for our institutional and wealth management clients. Chris is a voting member of the firm’s Tactical Asset Allocation Committee and Investment Policy Committee.