After 2022’s financial market performance, one would be forgiven for thinking “2023 can’t be worse?” But the difficult to accept reality is that markets are likely to remain under pressure well into 2023. That said, unlike 2022’s “batten-down the hatches” asset allocation strategy, we expect that in the 6–12-month outlook, there will be select asset classes that tactically outperform at different points due to the evolving business cycle and changing monetary policy landscape. This presents a challenge for investors but also ample opportunities to add value.

Bonds have an edge over equities in the near-term due to their downside mitigation during growth slowdowns, while equities may outperform strongly in the latter part of 2023 and into 2024 if/and when economies rebound on the other side of recession.

Regionally, we prefer US equity to developed international and emerging markets primarily due to the higher (albeit still low) likelihood of an engineered soft landing, which would boost US equity disproportionally. The outlook suggests staying defensive on a sector and factor basis, preferring healthcare and consumer staples, and quality and low volatility, respectively. We also continue to favour higher income and value equities for their lower exposure to re-rating risk and wide multiples spread to growth.

Shamik Dhar, chief economist, BNY Mellon Investment Management

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