10 for 2023 Special Edition Market Pulse

Market

MACRO & MARKET VIEWS

Economic Growth

On the heels of an aggressive tightening in financial conditions and restrictive monetary policy in 2022, GIR expects global growth to move below trend to 1.9% in 2023. Investors may be underestimating the resilience of the US economy, which contrasts with a mild recession in Europe and a bumpy reopening in China.

Inflation

Prices will likely slowly cool, with notable improvement in the policy-critical areas of shelter and wages. Supply chains have functioned better, with further improvements likely if China implements a more flexible COVID-19 strategy. Still, wage growth and long-term inflation expectations are likely key factors in forward monetary policy.

Monetary Policy

Sticky inflation remains the preeminent global concern, locking central banks (CB) into a pause-over-pivot bias in 2023. Consequently, CBs are eager to nudge growth below potential. In the US, GIR expects a terminal rate of 5-5.25% and no cuts in 2023. In the Euro area and UK, terminal rates may reach 3.25% and 4.50%, respectively.

Geopolitics

Acute geopolitical dynamics remain present as ever, hallmarked by conflict in Ukraine, territorial flexing by China, and entrenched societal polarization. On the latter, we expect increasing uncertainty in government composition and policy.

DM Equity

Rising cost of capital should accelerate the transition from highly bifurcated macro to deeply idiosyncratic drivers of return. To compete with compelling cross-asset opportunities, we believe a focus on profits over revenue, quality over capitalization, and company over country, is warranted. As current macro risks remain unresolved, a US equity tilt appears warranted, but the attractive cyclicality and potential FX tailwinds of non-US equities may emerge in 2023.

EM Equity

EM equities face a challenging composition of subpar growth and a sharp tightening in financial conditions. However, we believe pockets of value may exist in EMs that are closer to relief from inflation and rates, including Brazil, Chile, and Korea.

Rates

Global yields will likely move in tandem with CB policy paths, with potential differentiation due to regional energy exposure. GIR forecasts rates to top out in 1H 2023, though acknowledge the risk to the upside given policymakers’ willingness to overshoot. Globally, we believe the deepest level of curve inversion is behind us.

Credit

Credit fundamentals have peaked but remain on solid footing. US corporates have room for additional spread widening, but disciplined capital management, a low wall of debt maturity, and cash-rich balance sheets may act as buffers. In Europe, uncertainty around policy and energy pose headwinds despite attractive valuations.

Currency

Near-term US dollar strength may persist as global growth risk is to the downside. Over the longer term, the US dollar looks vulnerable to high valuation and global recovery. Should the global growth-inflation mix improve, the USD is likely to rebate recent gains.

Commodities

Supply challenges are structural, based on years of underinvestment. While weakness may persist from factors such as higher real rates, USD strength, and recessionary concerns, longer-term physical tightness will not be easily resolved.

2022: Year in Review

This past year saw a rapid economic deceleration, with inflation prevailing as the dominant global concern. Russia’s invasion of Ukraine amplified supply chain disruptions, and interest rates rose to a level not seen since the Global Financial Crisis. In the stream of so many headlines, many macro and market events may be hard to recall or believe. Looking ahead to 2023, we closed the 2022 chapter with a year-end review.

Market Pulse January 2023

Section Notes: ¹Bloomberg, ²Redfin, ³Federal Reserve, ⁴Word Tips, ⁵CoinMarketCap, and Goldman Sachs Asset Management. As of December 31, 2022. “YoY” refers to year over year. For illustrative purposes only. Goldman Sachs does not provide accounting, tax or legal advice. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary.

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Related Insights

December 2022

Point Break

Inflation continues to be the dominant global concern, even in a world of complex geopolitical dynamics that include military conflict in Ukraine, territorial flexing by China, and entrenched societal polarization. We expect the evolution of inflation and commensurate central bank responses to remain the prevailing theme in 2023. While waiting for the wave to break, however, investors must learn to surf.

December 2022