Kavan Choksi Discusses the Global Investment Outlook for 2023

The regime of the greater market and economic volatility is playing out, and is unlikely to go away soon in 2023. Kavan Choksi further points out that central banks have low chances of riding to the rescue in recession, contrary to what investors have come to expect. The current market landscape requires a new investment playbook. It would involve more granular views that go beyond broad asset classes and require for frequent portfolio changes.

Kavan Choksi talks about navigating markets in 2023

The Great Moderation, which was a four decade period of majorly stable inflation and activity, is long past at the moment. Now a new regime of the greater market and economic volatility has been witnessed, and it is unlikely to go away soon. By over tightening policies with the aim of reining in inflation, central banks are causing recessions deliberately.

In 2023, it is expected that the central banks shall back off from rate hikes eventually as the economic damage becomes clear. The inflation is expected to cool but remains persistently higher than central bank targets. Repeated inflation surprises have made the bond yields surge up, while crushing fixed income and equities. This level of volatility is in sharp contrast to the time of the Great Moderation. Higher yields have proven to be a boon to investors who were long starved of income in bonds. Moreover, investors did not even have to go far up the fixed income risk spectrum to receive it. According to analysts, investment implication of this trend would increase the popularity of agency mortgage-backed securities, short-term government bonds, and investment grade credit for income.

 A key feature of the current economic landscape is that it is shaped by production constraints. The shift in consumer spending from services to goods during the Covid-19 pandemic caused bottlenecks and shortages. Moreover, aging populations have led to worker shortages in many parts of the world. As a result, developing markets are unable to produce as much as earlier without creating inflation pressure. This is among the key reasons why inflation is so high even now, while activity is below its pre-Covid trend. As a result, it would be smart to explore inflation-linked bonds on both tactical and strategic horizons.

A key hallmark of portfolios in the last few decades was that bond prices shall go up as the stocks get sold off. This relationship, however, is not the same anymore. The attraction of fixed income is quite strong, as growing yields imply that bonds finally provide a good income. However, long dated bonds still face challenges, making investors prefer high grade credit and short term bonds.

According to Kavan Choksi, to navigate markets in 2023, investors need to upgrade their approach as per new investment trends and economic landscape. They must take more granular views by focusing on sub-asset classes, regions and sectors, instead of broad exposures. Two key assessments, which include the assessment of market risk sentiment, as well as how much economic damage is already reflected in market pricing, are vital for tactical portfolio outcomes in 2023.