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At the halfway point of 2023, one thing is clear: Goldilocks is still nowhere to be seen. We still aren’t holding our breath for a return to the macro environment of the last decade. Indeed, headwinds for economic growth, such as high inflation, high interest rates and lower productivity, continue to support our thesis for a slowing economy.
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.
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.
How broad, how deep? 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.
With peak inflation behind us, we believe the best opportunities in 2023
are now to be found in the relative safety of investment grade corporate bonds.
SVP Portfolio Manager & Team Lead
Senior Manager
Mackenzie Investment Strategy
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