Macroscope | Even with recession looming, 2023 will be a better year for investors
- The force and speed of monetary tightening may have been a shock but with the conditions for inflation easing, we are close to a peak in the interest rate cycle
- As yields rise, the outlook for bonds will improve, while the peak in rates will also be good news for the equity market
Investor confidence is fragile, and the news is not encouraging. So, what should we expect in 2023?
These so-called “long-duration” investments include long-dated bonds and those parts of the global equity market that rely on the promise of stable long-term earnings growth. Assets like long-term US Treasuries and the Nasdaq equity index have suffered more than most.
Much of this comes down to a once-in-a-generation adjustment in valuations. At the core is the reversal of long-term interest rates from the extremely low levels that characterised the era of quantitative easing. Remember, not so long ago, long-term German government bonds were trading with a negative yield to maturity. Thirty-year US Treasuries briefly flirted with a record low yield of 1 per cent during the onset of the Covid-19 pandemic.
These low yields set the tone for valuations across financial markets, allowing equity price-to-earnings ratios to rise well above their long-term averages. Investors benefited handsomely. Global stocks, represented by the MSCI World Index, delivered returns of 16.5 per cent in 2020 and 22 per cent in 2021.
