As we transition into the final month of Q1, it’s clear the strong paradigm shift that began last year is becoming fully entrenched in global markets. The higher rates set in 2022 to combat inflation are widely expected to remain the norm in developed markets. Going forward, consensus views anticipate a terminal rate of around 5.5% in the US, with European rates expected to settle in at around 4.0%. As this new paradigm crystallizes, the higher nominal rates are gradually being rolled into pricing for equities and bonds.

The scarcity of labor across developed markets also continues to weigh heavily on costs to consumers, and corporate margins most vulnerable to wage increases will suffer. A confluence of factors including persisting supply chain bottlenecks, new costs imposed by carbon neutrality goals, and a general trend toward de-globalization combine to maintain inflationary pressures on economies and businesses.

Businesses and countries that adapt to these changes by improving productivity through automation, enhanced worker training, and efficient utilization of the workforce will emerge victorious over the next decade. We anticipate that the impact of a tighter labor market will likely benefit technology companies (which are less labor-dependent in general), and also prove to be a boon to investments in real assets, where recurring labor costs are limited.

As this transition progresses, we believe volatility across markets will persist as flows vary more widely and profit expectations remain less certain. As a result, equities will remain under pressure in 2023, with stock picking strategies outperforming benchmark returns in the coming months and years.  Additionally, fixed income and credit markets offer compelling opportunities on the back of higher yields and wider spreads. Commodities—especially energy and agriculture—will also continue to benefit from supply shortages. Our asset allocations will conform to these theses as we adjust portfolios heading into Q2.


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