10 Big Investment Trends for 2023
This is a special issue of BMO GAM’s Monthly House View. Our usual format will return in February.
2022 has been a challenging year for markets, with interest rates rising, inflation hitting record highs, the Russian war in Ukraine causing geopolitical turmoil, and a recession now likely on the horizon. As we look ahead to 2023, questions on these and other issues remain, and new questions will surely present themselves. What forces will shape markets and economies over the next 12 months? And how will they affect investment portfolios.
This represents our best insights into what the coming year may hold—based on extensive research, hard data, and our team’s experience and expertise. With topics ranging from purchasing power and corporate profits to Energy and cryptocurrency, these are 10 big investment trends to look out for in 2023.
Loss of Purchasing Power Is Transitory
In 2022, wage growth fell behind inflation, eroding consumers’ purchasing power.
Not only was this development taxing for households, but it also increased the odds of labour conflict and social unrest in the year ahead—especially in Europe, which has underperformed relative to its peers, and in developing economies.
But as 2022 came to a close, inflation numbers cooled somewhat. This decline means that wage growth will likely outpace inflation in 2023, potentially creating a tailwind for the economy into 2024.
A repeat of the historic inflation pain of 2022 would be devastating. Thankfully, we don’t see it happening.
Negative Real Wage Growth Erodes Purchasing Power
#2: CORPORATE PROFITS
Corporate Pricing Power Is in High Gear
Pricing power—companies’ ability to increase the price of its products or services without a proportionate reduction in demand—is one of the key attributes of equities that amplifies the compounding of returns.
U.S. Aggregate Corporate Profits as Share of GDP (%)
#3: BALANCED PORTFOLIO
Are We in a New Regime of Monetary Policy?
Predictions of regime change in monetary policy are frequent, but they are extremely rare.
In recent years, the economy has experienced an intense cycle characterized by unanticipated headwinds, including COVID-19 and the Russian invasion of Ukraine. This has some analysts asking the question—have we entered a new regime?
S&P 500 & U.S. Treasuries Annual Performance Since 1928
The Future of the Balanced Portfolio
To paraphrase Mark Twain: Rumours of its death have been greatly exaggerated.
If History Is Any Guide, Government Bonds Should Regain Their Safe-Haven Status
#4: INTEREST RATES
Rising Debt Servicing Costs Will Cap Interest Rates
The public finances of major economies cannot endure sustained high interest rates.
As the chart below shows, public debt is already on the rise in major economies, and the increasing cost of servicing that debt is likely to put the brakes on excessive fiscal deficits. Governments’ elevated debt loads should put a ceiling on interest rates and prevent a regime shift in monetary policy.
Public Debt on the Rise Across Major Economies
Rising interest rates are likely to send debt-servicing costs back to the highs of the early 2000s. Private debt loads are also much higher now than before the Global Financial Crisis of 2007-08. Debt service is like a tax—money spent on servicing the debt is money not spent on goods and services. We expect greater scrutiny over public finances as the burden of interest rates is revealed in government budgets.
Debt Service Ratio: Private Non-Financial Sector
Debt Service Ratio: Households
Negative Interest Rates Are Gone. Will They Come Back?
Ideally, the world is past the regime of negative interest rates; as the chart below shows, the market value of negative yield debt has been declining steeply since a peak in 2020-21.
But elevated debt loads and policy makers’ eagerness to steer the economy means that we cannot rule out the return of unorthodox monetary policies of negative interest rates or quantitative easing— especially given central’s banks ‘whatever-it-takes’ approach to taming inflation. Going forward, central banks might support raising inflation targets to 3% from the standard 2% in order to reduce the odds of hitting interest rates’ zero-bound (i.e., 0% interest rates, from which point they can’t go any lower) too quickly during an economic downturn.
Bloomberg Global Aggregate Negative Yield Debt Market Value in USD
Navigating Turbulent Markets with Quality
Quality is the foundation of a portfolio’s strong equity core, and this is especially true for 2023.
Quality sectors and companies are characterized by high and stable profit margins, as demonstrated by the sectors at the top-left of the chart below. Resilience to fluctuations of the business cycle is also key during periods of elevated uncertainty, like the one we’ve experienced recently. With interest rates rising and the end of the era of free money over, we expect markets to refocus on the role of strong fundamentals as a driver of long-term performance.
Industry/Sectors Pricing Power
The Beginning of the End of the Wild West Era
Recent cryptocurrency-related debacles, including the collapse of crypto exchange FTX in November, mean that crypto will likely be subject to increased scrutiny and additional regulations in coming months.
Crypto is already banned in China, and as more instances of fraud become public, the likelihood of broader restrictions—in North America and around the world—increases.
Elevated Tensions are the New Normal
The war in Ukraine and rising geopolitical tensions around the globe have shone a new spotlight on conflicts’ potential effect on portfolios.
Peak Oil Production, New Oil Cycle?
The Energy outlook, now highly influenced by geopolitics, remains a vulnerable factor for the global economy.
Decarbonization efforts are accelerating, but conventional energy demand remains elevated. The reality is clear: replacing fossil fuels will be a huge, generational task. We suspect that the energy transition will be slower than expected, and the scarcity of oil supply leaves energy prices exposed to persistent tailwinds.
U.S. Oil Production and Outlook
Getting Old Means Getting Slow
China’s population is expected to peak in 2023, with Beijing’s well-publicized one-child policy leaving the country vulnerable to aging demographics and a distorted distribution of population by age.
As a result, China’s long-term fundamentals look increasingly challenging. In 2022, we strategically trimmed our exposure to Emerging Market equities because of our negative outlook on these fundamentals—and at this juncture, we see no reason to change our minds, despite the country’s likely economic reopening post-COVID in 2023.
China Population: Historical, Projections
#10: MACRO OUTLOOK
A Return of ‘The Great Moderation’
A key benefit to the low levels of inflation developed economies have experienced since the early 1980s has been a reduction in macroeconomic uncertainty—what economists have coined ‘The Great Moderation’.
The pandemic brought an end to this period of relative calm, as rising inflation brought about increased economic turbulence. But will the Great Moderation return? Our answer is yes. In 2023, as central banks stick to their inflation targets, we expect macroeconomic uncertainty to return to pre-pandemic levels.
Macro Uncertainty is Set to Moderate Once Again
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