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Investors are facing key macro, market, and policy pivots that will shape investment decisions in 2023. Inflation remains top of mind as investors await a dovish turn from the Federal Reserve and other central banks, and a strong US dollar is creating pain across much of the globe. Yet even as recession fears loom, we see select alpha opportunities across asset classes heading into 2023.

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We see five key themes driving global markets in the year ahead.

1

Decades of disinflation conditioned investors to expect longer expansions, shorter recessions, and shallower downdrafts in asset prices. The question now is whether the current cycle will upend these expectations – taking us back to inflation regimes when tight labor markets and persistent service inflation were slow to ease, rendering central banks slow to pivot – or whether we’re simply experiencing a longer-than-expected (yet transitory) aberration in inflation trends, owing to the unprecedented nature of its causes. Either way, inflation’s path this year could determine when we’ll see the “big pivot” in central bank policy that markets are looking for. The Fed has maintained its pace of telegraphed interest rate hikes, and a clear deceleration in core inflation and tight labor markets are needed to usher in a pause or reversal, even in the face of rising recession fears. The European Central Bank also seems intent on maintaining its record-fast rate increases to tame inflation as recession looms. Should the Fed “hike and hold” at 4.75%-5% for most of 2023, the impact of higher rates and QT will be tighter financial conditions. Meanwhile, China and Japan are the only major economies currently easing monetary policy after several years of holding it tight.

2

The dollar has reached multi-decade highs, and its outsize strength continues to weigh on other economies. Notably, the strong dollar is hitting developed as well as emerging markets, feeding inflation and thus raising the cost of imported goods. It’s also contributing to the need for some central banks to impose their own tightening of financial conditions, even if their economies can’t take it. Spooked by fears of a global recession, investors have flocked to dollars as a safe haven, and the Fed’s aggressive interest rate hikes have added to US investments’ allure. That said, we think the dollar is likely to peak in 2023, perhaps around the midyear mark.

3

A European recession looks increasingly likely, and even today’s resilient US economy is increasingly reliant on a dovish Fed pivot to ward off its own contraction. And while we believed China might help sidestep a global recession with its reemergence of growth after 2021’s policy-driven stall, the improvement we expect no longer looks vigorous enough to offset other downward forces. Recession fears are creating a feedback loop that drums up even more demand for US dollar-denominated assets. This too will pass, yet only after the first Fed rate cut, which may be well into the back half of 2023. The big question for investors is when to shift from defense to offense.

4

The outcome of China’s 20th Party Congress did not proffer hopes for a growth-oriented policy pivot, and while moving toward more collective ownership and centralized control will likely slow China’s growth over time, 2023 may buck the longer-term growth trend. China’s government has unveiled new, less-disruptive zero-Covid policies, including steps that will ultimately pave the way for a reopening, and just reloaded support for private property developers – changes that may lift China’s economy as the year unfolds. If so, China will be one of the few accelerating economies in 2023. The longer-term weight of greater state control appears more than fully priced in to asset valuations, presenting a potential counter-trend opportunity in 2023.

5

The war in Ukraine has called into question how Europe will manage through a winter without Russian oil, creating new urgency behind energy autonomy and momentum for green energy and renewables. Multinationals and investors may also be warier about investing in countries under autocratic regimes, where the rules can change on a dime – sentiment that could affect China as well, with Xi’s consolidation of power. Meanwhile, results from the US midterm elections ushered in renewed gridlock, while Brazil’s rejection of Bolsonaro could provide further tailwinds for environmentally friendlier growth. Climate investments appear poised to rise substantially, eating into the global savings glut.

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Explore our key convictions for each asset class in our 2023 Investment Outlooks.

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Spotlight on Asia

2023 Asia ex Japan Equities Outlook
2023 Asia ex Japan Equities Outlook

2023 Asia ex Japan Equities Outlook: Selective Investing Through the Trough

Uniquely to Asia, Covid-19 remains a major market factor even as its influence on investments has shifted to the sidelines in other regions. This also partly explains the divergence in performance across the region. In a slowing global economy with many moving pieces to contend with, the question on Asia equity investors’ minds is how and where to find diversification and long-term growth in an environment of instability and inflation. PineBridge’s Asia equity investment leaders share insights on where they are seeing opportunities in the year ahead.

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2023 Asia ex Japan Equities Outlook
2023 Asia Fixed Income Outlook
2023 Asia Fixed Income Outlook

2023 Asia ex Japan Fixed Income Outlook: Seeking the Right Risks

While we expect the macroeconomic environment to be more challenging in 2023, Asia looks relatively well-positioned in a global context. Subdued and largely manageable inflationary trends within many local economies will likely create a backdrop for monetary policy to move closer to neutral without being overly restrictive, with a few exceptions. Omar Slim, Portfolio Manager, Fixed Income, and Andy Suen, Portfolio Manager and Head of Asia ex-Japan Credit Research, Fixed Income, share their calibrations across Asia fixed income amidst expectations of continued return dispersion in 2023.

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2023 Asia Fixed Income Outlook

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Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.