The past year has been volatile, to say the least, for investors across different asset classes. From fast-growing trends in ESG and digitalisation on one end of the spectrum to geopolitical tensions, inflation and sharply rising interest rates on the other, markets have seen no shortage of disruption.
Central banks across the US, UK and Europe have reversed course after years of easy monetary policy. Inflation can no longer be viewed as transitory; instead, it is rampant. Fixed income markets struggle with too much liquidity and cash positions reaching historical highs. Investors have their eye on the Federal Reserve in particular; interest rate hikes are expected to continue, with some forecasts predicting a key rate above 5% next year. With little hope of looser monetary policy in 2023, it seems the bear market is likely to continue.
On the heels of the war in Ukraine, we appear poised on the brink of another inflexion point for global markets. Inflation, supply chain disruption, trade tensions and mounting global pressures have created a turbulent atmosphere, prompting a transfer of capital out of public markets. Monetary policy has shifted from easing to tightening. Asset purchase programmes from the European Central Bank are at an end, with similar stories playing out across the globe.
And yet, where traditional lenders like major banks are drawing back, we see real opportunities for private capital to fill the void. With less traditional financing available amidst increasing demand, “real money” is stepping in to address the imbalance and support the global economy.
Against this backdrop, will the story of the year be entirely doom and gloom—or is it a splendid opportunity for investors to reenter formerly inaccessible or expensive markets?
Our perspective on the market outlook
Last year, we wrote about the rise of non-bank lenders, a trend we expect will gather even more steam in 2023 albeit with some expected shake-out. As lenders find it troublesome to service debt, new investors will have more opportunities to enter the fray. Securitisation investors who were once squeezed out of the market by the likes of the ECB can finally make their way back in. Private investors will have the chance to buy either performing or NPL debt at a discount. As interest rises, so does spread, making for higher returns—though, granted, with increased risk.
Even if we have not yet seen the peak of interest rates passed down from the Fed, higher yields mean a better outlook for bonds moving forward. Credit spreads may continue to widen, but the influx of real money will better absorb market turbulence.
In all, elevated market volatility has generated better entry points for investors in securities and private debt markets, presenting opportunity for investors and enabling markets to course-correct over the long term.
Market sentiments are cautiously optimistic
Managers across asset classes tend to agree that while a degree of caution is in order, the outlook for 2023 is not entirely negative.
Samy Muaddi, Portfolio Manager of the Emerging Market Debt Strategy at T. Rowe Price, observes that, “While the macroeconomic backdrop is dim with lingering liquidity concerns in the short term, strong valuations not seen in a decade are supportive of a contrarian view in some sectors of fixed income.” And according to J.P. Morgan’s asset management group, “Both stocks and bonds have pre-empted the macro troubles set to unfold in 2023 and look increasingly attractive, and we are more excited about bonds than we have been in over a decade.”
While macro events remain a source of disruption, particularly as war threatens to continue destabilising Europe for the foreseeable future, it is worth remembering that security prices are not the result of events alone. Favourable events don’t always lead to rising prices, and negative events don’t always lead to declines. Security prices are determined by investors’ reactions to events—or, more specifically, how events measure up to investor expectations.
The upshot is that markets can—and generally do—remain buoyant in the face of adversity. Of course, caution is needed; it’s easy to get burned in volatile markets. But with the right advice, investors can find new opportunities and even grow in difficult times.
In short: volatility does not equal disaster. We see securitisation and private debt as resources that will help reverse financial setbacks before bank policies ease. For the first time in years, there is incentive for real money investors to return to the market.
Market corrections, while painful, are a necessary part of the business cycle. Investors who can keep calm heads during difficult times will find themselves positioned strongly once balance is restored. When the dust settles, we expect to see 2022-2023 as an inflexion point representing the revival of a healthy market.
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