Actionable ideas for a volatile world

Outlook 2023Actionable ideas for a volatile world

5 Actionable Ideas for 2023

Navigate an uncertain fixed income market with flexibility and agility

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Capitalize on a historic income opportunity with municipal bonds

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Find visibility by investing in high-quality growth

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Leverage a broad and deep opportunity set for sustainable investing

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Look beyond traditional investments by adding alternatives

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In 2022, inflation accelerated across much of the world and reached its highest readings in decades. Demand was driven by prior fiscal and monetary stimulus and supply-chain disruptions worldwide.

Markets were rocked as a result and policymakers moved aggressively to remove accommodation.

Volatility may remain with us in 2023, at least for a time. But with volatility comes opportunities across asset classes, if you know where to look.

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Economist Derek Hamilton tackles the macroeconomic outlook at mid-January 2023. Will the fed be cutting by year-end? How much will inflation fall? Has it fallen? What roles will consumer and investor sentiment have?

Macroeconomic outlook

We believe the economy will fall into a recession in 2023, mainly due to rapid tightening in monetary policy, as the US Federal Reserve raised interest rates at the fastest pace since Fed Chair Paul Volcker broke the back of inflation in the early 1980s.

A recession could cause further volatility in the markets, though odds of a severe recession or crisis should be muted.

The Fed has raised rates at the fastest pace since the early 1980s

US federal funds rate, year-over-year change (%)

US federal funds rate, year-over-year change chart

Sources: Macquarie, Macrobond, US Federal Reserve. Market-implied forecasts indicated by dotted line.

Until now, inflation has been sticky, and we don't expect this to change much in early 2023. We expect the impact of housing market inflation to peak in the first half of 2023, along with the combination of waning demand and improving supply to result in lower inflation later in the year.

It’s possible a significant improvement in the inflation environment, coupled with falling demand, could allow for lower interest rates sometime in late 2023 or early 2024. Regardless, the Fed will likely be late to the party in cutting interest rates, just as it was in raising interest rates in 2022.

Historically, prices for services (excluding energy) follow demand

Nominal final sales to private domestic purchasers* and Core Services CPI

Nominal final sales to private domestic purchasers* and Core Services CPI chart

Sources: Macquarie, Macrobond, US Bureau of Economic Analysis (BEA), US Bureau of Labor Statistics (BLS).

*Private GDP less foreign trade and inventories.

c.o.p. = change over period.

We expect economies in the rest of the world to struggle as well:

  • The Russian invasion of Ukraine has caused immense stress on Europe in the form of higher energy prices and reduced business and consumer confidence. The inflation shock of this situation alone should result in a recession throughout much of Europe, which could last until around mid-2023.
  • The outlook for China is becoming increasingly clouded. The government’s commitment to its zero-COVID policy should continue the recent stop-and-go economic pattern.
  • China is likely to stimulate its economy in the short term, and an eventual move away from its zero-COVID policy should result in an acceleration in growth. Even so, we are concerned about China’s long term growth prospects.
The global economy faces diverse and complex challenges, but we can play a key role in presenting opportunities to our clients that will generate positive impact for everyone.”

Ben Way

Group Head, Macquarie Asset Management

Read Ben Way's letter to investors.

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The views expressed represent the investment team’s assessment as of December 2022 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Investing involves risk including the possible loss of principal.

Past performance does not guarantee future results.

All charts are for illustrative purposes only. Charts have been prepared by Macquarie Asset Management unless otherwise noted.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue.

The disruptions caused by natural disasters, pandemics, or similar events could prevent the Fund from executing advantageous investment decisions in a timely manner and could negatively impact the Fund's ability to achieve its investment objective and the value of the Fund's investments.

Fixed income securities and bond funds can lose value, and investors can lose principal as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment in private market securities. Such securities may be available only to qualified, sophisticated investors, may have liquidity constraints, and may bear the risk of investment in private markets securities.

Private market investments may entail a high degree of risk and investment results may vary substantially on a monthly, quarterly or annual basis. Among many risk factors, some are particularly notable. These include, without limitation, the general economic environment, the health of the housing market, employment levels, the availability of financing, the quality of servicing the assets backing the securities, the seniority and credit enhancement levels for structured securities, government actions or initiatives, and the impact of legal and regulatory developments. Additionally, private markets strategies may represent speculative investments and an investor could lose all or a substantial portion of his/her investment.

The Core US Consumer Price Index (Core CPI) is a measure of inflation that is calculated by the US Department of Labor, representing changes in prices of all goods and services, excluding those with high price volatility, such as food and energy, purchased for consumption by urban households.

For financial professional use only. Not for use with the general public.