The impact of slowing growth, tight monetary policy and high inflation shall last through 2023. However, Kavan Choksi also mentions that the economic cycle is likely to turn once the real interest rates peak. This shall create opportunities for increasing portfolio allocations to risky assets.
Kavan Choksi provides recommendations for investing in 2023 for improved returns
The tightening of monetary policies amid a global slowdown the economic activity leads to a pretty unfavorable configuration for risk assets. Along with recession, further cuts in corporate earnings expectations are some of the prime risk factors for both bonds and equities. Peak real rates, however, can provide a turning point in the markets. For this purpose, the Feds shall have to interrupt its rate hike cycle as unemployment rises and inflation slows down. When this inflection point ultimately approaches, an increase in risk levels in portfolios would be seen with the addition of more duration government bonds and gold, and even certain equities.
Cautious exposure to risky assets is important based on macroeconomic conditions, while putting more emphasis on assets that have better odds of withstanding the impact of higher rates or weaker growth. This specifically means holding investment-grade credit, government bonds and quality equities. It also implies to overweighting cash positions for the purpose of investing as soon as opportunities can be seen. As Kavan Choksi further points out that in the coming months, one is likely to see new lows in the equity markets as the high borrowing expenses limit the expansion of company multiples while earnings estimate to adjust to recessions. In this situation, investing in well-established companies with improved ability to defend their margins and low earnings volatility would be a good idea. Such stocks ideally outperform when earnings decline, such as during recessions. When it comes to quality sectors, healthcare is among the best ones, as it enjoys a level of insulation from inflation and high margins. Moreover, its valuations remain relatively undemanding in comparison to other distinctive defensive growth sectors.
As the market conditions shall remain relatively challenging in 2023, it would be a prudent move to favor resilient hedge fund strategies like discretionary, quantitative and global macro. They can provide much needed diversification to the portfolio, as they benefit from performance dispersion across regions and asset classes. Their convex profiles are typically designed to perform over more extreme periods. Hence, they are likely to benefit from the volatile environment while having a limited correlation to underlying markets. Certain relative value strategies may also provide attractive returns once rates stabilize.
For a good part of 2022, gold prices were caught between downward pressures from real rates and the strong dollar, as well as support from geopolitical and recession risks. Gold prices may witness a rise in 2023 with a weaker dollar, re-opening in China and lower rates. As investor sentiment improves over 2023, the appetite for risky assets shall also go up. As inflation and the threat of higher rates start to fade over time, equity valuations and multiples shall also benefit. By the middle of 2023, ales and earning expectations will be revised downward, and the market is likely to look ahead to 2024 and the recovery from the cyclical slowdown.