The start to 2023 has benefitted from the reduction in acute European energy risk and from strong economic momentum in China’s reopening. Recent data trends have strengthened the global “soft landing” narrative, though good news remains a double-edged sword. Resilient growth may potentially invite additional rate hikes and threaten to elongate the economic adjustment that began last year. Consequently, the evolution of the growth-inflation mix and commensurate monetary policy responses remain our prevailing risk in 2023.
In our view, macro conditions and capital markets are at a critical juncture. In the initial stages of rate hikes in 2022, policy was decisive, with the primary goal of tightening financial conditions. Today, as central banks in resilient economies approach their respective terminal rates, loosening financial conditions and resurging growth may mean the job is not yet complete. While the debate between hard landing and soft landing may be somewhat balanced, market implications are not. Recessionary downside risk, combined with recent financial system stability concerns, remains significant, while additional upside corresponding to a sustained recovery is limited. Accordingly, managing risk over returns is as important as ever.
In this edition of the Market Know-How, we consider how investors may navigate market asymmetry with emphasis on:
- Maximizing after-tax income with taxable fixed income on the short end and tax-exempt municipals on the long end.
- Normalizing global equity exposure to strategic targets as non-USD equity outperformance has further room to go.
- Adding exposure to private credit, which has benefited from enhanced structures between issuers and borrowers.
