Northern Trust Asset Management expects ongoing but tempered volatility in 2023 as worries over inflation and interest-rate hikes give way to lower inflation, a pause in rate increases and a weak global economy.
1. Corporate Profit Pressure
Northern Trust says it sees downside risk to corporate profits, "consistent with an economic slowdown or recession." However, pockets of economic durability should limit a U.S. earnings downturn, the firm says.
While equity valuations should be less of a headwind in 2023, Chris Shipley, Northern Trust chief investment strategist for North America, noted, the year should be volatile for equities globally as economic growth and corporate profits disappoint but sentiment improves.
Northern Trust is neutral weight developed-market equities and, given China's struggles, underweight emerging-market stocks.
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2. Better Sentiment?
Investor sentiment should improve, Shipley said, as inflation slows and central banks pause their rate hike campaigns in 2023.
Sentiment has runway to improve from beaten-down levels, especially in Europe, according to the firm.
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3. Developed Market Outperformance
Developed markets should perform better than emerging markets, where "intermediate-term challenges outweigh a bumpy and uneven reopening of China," Shipley said.
Northern Trust says it prefers to play China's reopening through developed-market stocks, where there's greater clarity.
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