Last year in investments saw uncertainty and bumps along the road, however, this year could see a positive change, according to the Market Outlook 2023 report by The Family Office.
The key takeaways from this report surround three parts; equity-bond correlation, drivers of change and investment strategy.
Equity-bond correlation has been negative over the last two decades, the fall of one leading to a rise of the other and vice versa. This has created a diversification effect, limiting the downside for investors who have both assets in their portfolio.
Higher inflation rates combine with economic uncertainty in 2023 could cause the correlation to become positive.
The drivers of change
There are three drivers of change; interest rates, inflation and economic outlook.
Interest rates are likely to be affected as The Federal Reserve is likely to maintain high interest rates for an extended period.
Inflation is also expected to remain relatively high due to effects of fundamental shortages in talent and housing.
The economic outlook, despite resilience in consumer spending are to see a bear market and mild recession as corporate earning expectations are yet to readjust.
Investment strategies are to be adapted to the changing fundamentals.
Primary drivers of inflation
The primary drivers are wage, shelter and food inflation with wage inflation being the factor of concern among the three.
The growth in wages has more than doubled since pre-pandemic levels, partly due to the global growing shortage of talent. According to a Korn Ferry study, more than 85 million vacancies could still be open in 2030 due to a lack of qualified candidates.
The US real estate shortage of over 2 million hopes will continue to bolster shelter CPI.
Although forecasts are still positive, the number is the lowest growth trajectory forecast for over two decades.
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