Soaring inflation gave central banks little choice but to hit the economy with the largest rate hikes in over 40 years throughout 2022.  We do not foresee a large default wave in 2023, as the refinancing calendar for the high-yield bond market will not be significant until 2025. We believe that if central banks are forced to maintain policy rates at these levels to rein in inflation, tighter financial conditions will be a headwind for business fundamentals in 2023. 

Despite the clouds building in the economic backdrop, we believe that equity markets will begin to look through the valley of an economic slowdown towards the next business cycle. This will set up for a broad-based equity recovery later in the year. In the meantime, focusing on high-quality companies with near term earnings visibility and low sensitivity to economic growth can provide solid equity returns in the face of higher economic uncertainty.

The turmoil of 2022 will likely have staying power into the next year and beyond. Geopolitical risks have also been simmering with respect to US-China relations. The ongoing trend of tough-on-China policies deployed by the US is unlikely to change. Heightened geopolitical risks justify a more defensive position in equities, favouring dividend paying companies and higher-quality businesses that exhibit lower volatility.