A quick review of 2022
Last year, we moved away from the era of very low interest rates as central banks raised interest rates with the aim of lowering the inflation rate to 2%. We’re not there yet and more interest rate increases could be on the way to stabilize prices in 2023.
World events also contributed to market volatility and will continue to in 2023. This includes the effect of the war in Ukraine on oil and gas prices. It also includes evolving U.S.-China relations and how they might upset economies in Asia.
About this outlook
To gather the opinions in this article, Canada Life teamed with several of the industry’s most sought-after investment managers. That’s because no single asset manager is an expert in every asset class. And it’s why Canada Life Investment Management Ltd. uses a multi-manager approach that draws on several management styles, investment philosophies and risk management strategies.
Inflation in 2023
There are indications that inflation may be reaching its peak in some regions including the U.S. and Canada. This provides optimism that some inflation stability may arrive during the second half of 2023.
Interest rates in 2023
Rising mortgage interest rates have slowed the housing market. This will likely continue as long as rates continue to remain higher. Rising rates will also put the brakes on consumer spending which has already begun.
Equity markets in 2023
Higher interest rates are seen as positive for businesses in the financial sector. On the other hand, rising interest rates are generally negative for companies who have a lot of loans, such as real estate investment trusts.
By raising interest rates, the U.S. Federal Reserve and the Bank of Canada have committed to doing whatever it takes to bring down inflation, even if it means higher unemployment, slowing the housing market, or causing a recession. This will have significant implications for stocks, too. Market volatility will likely be a major factor for equities in 2023.
Fixed income markets in 2023
While the speed and size of interest rate increases negatively impacted fixed income returns in 2022, investors can look to benefit from more reasonable returns from bonds in 2023.
If some global economies fall into recession, the overall effect on fixed income markets could be positive as investors look for a safe haven in bonds.
A recession in 2023?
Fiscal policymakers remain concerned that strong labour markets could keep the pressure to increase wages high and prevent inflation from declining quickly. The longer that higher inflation persists, the greater the risk of a recession.
A recession is still on the radar for the U.S. and Canada, although it’s expected to be relatively short.
The war in Ukraine
In Europe, the war in Ukraine has reshaped how governments think about energy security and contributed to the highest inflation in decades.
A resolution to this war, potentially resulting in more well-oiled supply chains, would boost global economic growth in 2023.
China in 2023
Chinese President Xi Jinping’s reappointment for a third term has increased the risk that China could move to reunification with Taiwan. As well, weakness in their property sector could be negative for economic growth in 2023.
Responsible investing
In 2022 and before, social unrest, the COVID-19 pandemic and extreme weather exposed income and wealth inequality and climate change threats.
While painful, transitioning to renewable resources remains inevitable as fossil fuels deplete. Global governments, too, remain committed to “net-zero” emissions targets by 2050, and will aim to craft policy accordingly.
While responsible investing came under pressure in 2022, investors should adopt a longer-term mindset and maintain focus on the big-picture trends.