State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT), today published its 2023 Global Market Outlook: Navigating a Bumpy Landing on macroeconomic trends and key investment themes for the year ahead. State Street Global Advisors believes that market uncertainty and volatility will persist for some time and that investors should evaluate their fixed income and downside protection strategies as they await a possible recovery and a better environment for risk-taking.

Despite the slowing global economy and geopolitical headwinds, State Street Global Advisors remains cautiously optimistic that an inflection point is in sight and that inflation across the globe will trend lower within the next six months. The firm believes that improved supply and slowing demand figures are likely to allow for powerful disinflationary episodes to unfold, and expects that more favorable inflation data will allow the Federal Reserve to downshift from its hawkish stance and likely cut rates in the last quarter of 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,” said Lori Heinel, Global Chief Investment Officer. “The near 20% appreciation of the US dollar in 2022 has also intensified the global growth challenge and may expose unanticipated vulnerabilities.”

Equities walk a tightrope

State Street Global Advisors believes that equities will begin to sustainably recover in 2023, but points out in its outlook that the pain equity investors feel is unlikely to subside until mid-year, with the exact timing of the relief tied to the actions of central banks.

“Against this challenging macroeconomic backdrop, we are focusing on quality stocks, by which we mean companies with stable earnings and strong business models which we believe are resilient enough to manage pricing pressures,” said Gaurav Mallik, Chief Investment Strategist. “In emerging markets, the weakness of China markets and the strong US dollar limit equity opportunities. We expect that challenges and volatility will remain in 2023, but we also believe that investors should be prepared for a recovery and may benefit from deploying dry powder at a prudent time.”

“As 2023 begins, many investors in the US expect the economy to weaken, corporate profits to face downward pressure, and job losses to rise due to the lag effects of aggressive Fed rate hikes,” said Mike Arone, Chief Investment Strategist for the US SPDR Business. “Markets anticipate sub-trend growth in 2023, but investors will likely begin to price in the next phase of the economic cycle before the economic, earnings, and job market data begin to show signs of recovery.”

A buying opportunity in fixed income

Rising interest rates, market volatility, and widening spreads across sectors have pressured fixed income total returns with an intensity that few expected, leading to one of the most trying years for fixed income investors in recent memory. While headwinds are expected to continue in the near term, State Street Global Advisors believes that there will be bright spots for long-term investors in 2023, as widespread sell-offs and continued volatility have opened up some attractive opportunities.

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

More volatility, more downside protection

In an environment of heightened market uncertainty and volatility, the firm also highlights in its outlook that investors need to consider the portfolio guardrails they have in place to withstand market disruptions.

Altaf Kassam, EMEA Head of Investment Strategy and Research, added, “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. 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.”

Peak dollar

State Street Global Advisors also thinks that the US dollar, strengthened by rising relative yields and its appeal as a safe haven during a tumultuous time since the end of 2020, will reach its peak and begin to decline in 2023. The firm sees that the most likely outcome is an environment in which ex-US growth narrows the gap with US growth. The firm believes that the transition from inflation to disinflation and a policy shift by central banks to focus on growth will open the door for a broad rally in risk assets, particularly non-US equities.

Expiration Date: December 31, 2023

Tracking Number: 5326837.1.1.GBL.RTL

About State Street Global Advisors

For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s fourth-largest asset manager* with US $3.48 trillion† under our care.

*Pensions & Investments Research Center, as of 12/31/21.

†This figure is presented as June 30, 2022 and includes approximately $66.43 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.

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