Review of Market Performance: Calendar Year 2023
Risk assets enjoyed mostly positive returns in CY 2023. Developed markets equities led as fears over the severity of a possible recession moderated and inflation declined.
Authored by: Sehr Dsani
2024 Outlook: Public Equities
We expect global equity performance will be below its long-term median level, but we believe investors should hold equity allocations in line with policy targets. Within equities, we see opportunities in developed value, developed small caps, and China. We doubt European and emerging markets ex China equities will outperform, and we believe the share of active strategies that outperform will increase.
2024 Outlook: Real Assets
We expect REIT and public infrastructure performances will improve, given undemanding valuations and our view on interest rates. We believe private infrastructure funds will perform well, and we think nuclear energy will emerge as a small but important opportunity.
Review of Market Performance: Fiscal Year 2023
Risk assets enjoyed mostly positive returns in fiscal year 2023. Equities rebounded as fears over the severity of a possible recession moderated. Emerging markets equities lagged developed markets as the pace of reopening in China disappointed. Bond performance improved as credit assets posted positive returns but developed markets sovereign bonds struggled. Real assets suffered due to higher interest rates and slowing demand.
US Real Estate Faces Challenges, But Opportunities Exist
Commercial real estate is not immune to economic cyclicality, and we think the sector will be challenged through an economic downturn. However, we think cyclical pressures will likely create opportunities in select sectors and advise investors to selectively invest in these areas to benefit from a rebound during the recovery.
VantagePoint: Banking Crisis Implications for Asset Allocation
We entered 2023 with a view that a recession in some economies, namely the United States and much of Europe, was likely this year, and the recent banking sector stresses reinforce our confidence in this view. Investors should be disciplined in maintaining policy targets broadly, remembering the role allocations to stocks, bonds, and cash play in portfolios.
Review of Market Performance: Calendar Year 2022
Calendar year 2022 witnessed multi-decade record inflation and central banks responded with rapidly tightening monetary policy. Rising rates saw the correlation between bonds and equities turn positive, contributing to large declines across most asset classes. Funds flows diverted away from growth and momentum strategies, and yield curves flattened with the ten-year/two-year yield curve becoming inverted in most developed markets, signaling economic uncertainty ahead.
Review of Market Performance: Fiscal Year 2022
Fiscal year 2022 was a challenging one for public market investments. Rising levels of inflation across most developed and emerging markets saw central banks become more aggressive in their monetary tightening plans. This in turn saw correlations between bonds and equities become positive; bonds declined as a direct result of higher inflation and tighter policy, while equities weakened in response to the higher cost of capital. This chart book presents returns and other market metrics for fiscal year 2022.
Are Global Corporate Earnings Expectations Too Lofty?
Yes, we think corporate earnings expectations are likely too high. This is because earnings are well above the long-term trend, and we expect inflation and higher policy rates will put downward pressure on profits margins.
Will Concerns Over “Greenflation” Derail the Energy Transition?
No. The inflation attributed to green initiatives (known as “greenflation”) is part of the current inflation narrative, but we doubt concerns related to it will derail the global energy transition.