Inflation inflection point in 2023 sights: SSGA

Yasmine Raso

Senior Journalist, Financial Newswire

12 December 2022

An inflection point is coming in 2023 says State Street Global Advisors’ (SSGA’s) 2023 Global Market Outlook titled ‘Navigating a Bumpy Landing’, as the manager remains “cautiously” optimistic despite a global economic slowdown.

SSGA said while it holds the belief that market volatility will continue into next year, “an inflection point is in sight” and worldwide inflation may decrease within the next six months as supply levels improve, demand smooths and the Federal Reserve leans toward slashing rates in Q4 2023.

“We have seen the global economic slowdown intensify across both developed and developing economies, and we have lowered our projected global growth to 2.6% in 2023,” Lori Heinel, Global Chief Investment Officer, said.

“The near 20% appreciation of the US dollar in 2022 has also intensified the global growth challenge and may expose unanticipated vulnerabilities.”

While fixed income has suffered from rising interest rates, market volatility and widening spreads across sectors, the manager sees some opportunities for long-term investors in the year to come from sell-offs and persistent uncertainty.

“We see value building in rates and prefer duration over spread products, and investment grade over high yield,” Michele Barlow, Head of Investment Strategy and Research for Asia Pacific, said.

“As more clarity appears on the credit landscape, we see opportunities for investors to consider global fixed income markets, including emerging market debt, which has been repriced to attractive levels.

“There is growing evidence that a peak in rates is nearing, so while credit still faces some near-term headwinds, we think it will be a buying opportunity in the coming quarters.”

SSGA also recommended investors take up downside protection strategies and rethink their exposure to fixed income in order to buckle down portfolios and await a better time for risk-taking.

“We believe that the ‘Great Moderation’ period is over, with central banks less likely to backstop markets as they fight inflation and look to reduce their balance sheets,” Altaf Kassam, EMEA Head of Investment Strategy and Research, said.

“The ‘new normal’ higher-volatility environment should still provide opportunities for equity investors, but it will also likely feature deeper drawdowns and shallower recoveries.

“Actively managing the risk of the current environment will require effective downside protection strategies.”