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The combination of high and rising inflation, along with the sheer pace and magnitude of monetary and financial tightening, left investors with few places to hide in 2022.
With the current pace of world growth at 2%, a rate typically characterised as a global recession, we anticipate that investors are likely to quickly shift their focus from inflation and interest rates to the deteriorating outlook for growth and earnings in the year ahead. We reflect on 2022’s macroeconomic volatility and share why we believe 2023 will be characterised by peaks in inflation and interest rates, and a trough in economic activity.
Our macro outlook explores:
The extent and ability of central banks to adjust policy in response to weaker growth will depend on how far and fast inflation falls.
Geopolitics will remain potential sources of market volatility. Economic downturns will be less severe if inflation falls more rapidly than forecast and central banks cut rates sooner rather than later, and there could be more ‘breakages’ in the global financial system.
Expect to see the correlation between bond and stock returns turn negative once more amid the shift from inflation to recession fears.
We believe investors should continue to favour defensive rather than cyclical and growth-sensitive assets until the trough of the downturn and subsequent recovery is in sight.
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