New Year New Markets
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Well, 2022 is now in the past and it was definitely a year to remember. For investors, many will say it was a year to forget! While everyone is looking forward to a new year with promising resolutions (along with the obligatory "new year, new me" promises), it's important to take a look back at the year that was, and what we can expect for the year ahead.
What happened, may happen and our guidance
Market turbulence dominated the economic landscape in 2022. Geopolitical conflict, rising interest rates and record inflation heightened recessionary risks for many economies as financial conditions became increasingly constrained. As a result, TD Asset Management Inc. (TDAM, "we") witnessed significant repricing in fixed income and public equity markets. Real estate valuations have also cooled.
While the current uncertain macroeconomic backdrop may imply continued market volatility entering 2023, we believe that underlying market fundamentals remain relatively sound as corporations, particularly in North America, remain generally well capitalized. We are also beginning to see signs that inflation levels may be moderating in some economic categories, such as used cars, shelter, and commodity prices, which may suggest less hawkish global central banks in the coming months.
In broad terms, earnings for North American companies have been relatively positive, though most sectors continue to face challenges and we anticipate overall softer demand in 2023. Within equity markets, current forward estimates for earnings and revenues will likely need to be revised lower in the coming quarters and this may put added pressure on stocks globally in 2023. If markets trend lower in the coming quarters, our perspective remains that market drawdowns can provide opportunities. Broad selloffs often create dislocations within equity markets, where quality companies begin trading at valuation discounts, making them attractive long-term investments.
While bond markets also saw broad declines in 2022, as rapidly rising yields drove bond prices down, today’s starting yields offer attractive entry points for those able to look beyond near-term volatility. Yields across fixed income sectors are well above the lows of the past decade and offer solid potential for quality future returns. Additionally, we maintain a positive outlook for alternative assets which can provide long-term inflation protection and attractive absolute returns.
In a nutshell
- Global equity markets may experience headwinds as economic conditions deteriorate into 2023. We feel that market expectations are still not sufficiently pricing in a recessionary scenario, as leading growth indicators and employment remain neutral to strong.
- The historically unprecedented pace of central banks' rate hiking cycle, amid the backdrop of high global debt, may have unintended consequences for various asset classes. Additionally, the rapid rise in rates to combat persistently high inflation and wage pressures continues to drive concerns around a global recession.
- For investors looking beyond near-term volatility, yields across fixed income sectors are well above the lows of the past decade and now offer higher potential returns. We believe fixed income may outperform equities over the next 12-month period.
- Given that high equity volatility is likely to persist for risk assets, investors may benefit from an allocation to alternative assets to help manage portfolio volatility. Assets like mortgages, infrastructure and real estate may also provide some long-term inflation protection and attractive absolute returns.
Access to the insights
For access to TDAM's full report on the year ahead, please check out Market Perspectives The Year Ahead 2023.
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
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