As the calendar shifts to 2023, many wonder what the new year will bring. A recent easing of inflationary pressures and looking out beyond a potential recessionary environment, some optimism has returned. However, caution remains the watchword for many professional investors. Here are the views of portfolio managers, strategists, and executives from Natixis Investment Managers and its affiliated investment firms about what they expect from the markets in 2023:

Cautious outlook for private equity in 2023

Eric Deram, managing partner, Flexstone Partners

After a year that saw relative buoyancy in the global private equity space, underpinned by the dominance of the ESG agenda, strength in fundraising, increasing prominence of co-investments and secondaries, our industry now faces a rapidly evolving and highly complex outlook. Flexstone Partners’ 2023 outlook is cautious.

We note, however, that Private Equity outperforms by a wider margin during periods of volatility and fund-raising contraction. As a global investor in mid-market private equity funds, co investments and secondaries, we have five key predictions of what’s to coming the year ahead:

1. Amounts raised in private equity will be substantially down in 2023.
2. 2023 will be a buyers’ market for private equity secondaries.
3. As funds take a more center stage in Private Equity, expect increased scrutiny from regulators and LPs.
4. As inflation, global recession and increased interest expenses take their toll, private equity valuations will come down in 2023, just like they did in 2022 for public equities
5. Persistent inflation in 2023 and slowdown in China will further impact CAPEX and export oriented businesses, especially in Europe.

Recovering from the COVID-19 fog

Elaine Stokes, portfolio manager and co-head of the full discretion team, Loomis Sayles

For the last two years, markets have been focused on a global pandemic, war, inflation and the actions governments and their central banks could take to mitigate economic uncertainty and market volatility. Now that we are past peak uncertainty, we as managers can start to focus on the strategies and long-term trends that will shape markets for years to come.

As the fog lifts, I believe the starting place for fixed income investors provides far more income, cushion and opportunity. Portfolio focus needs to move from interest rate bets to credit selection. Carry is likely to become far more important in the next few years as we see volatility come down from the extremes of the COVID era and the likelihood of severe tail risks subside. Investors are once again being paid for some level of volatility and risk. As we work though the slowdown in growth and the ramifications of aggressive central bank policy, it is important to stay nimble, be active and know your credits.

Slower growth and stubborn inflation will be the backdrop for investors. Although growth will take a hit from central bank policy actions, China’s reopening and its potential effect on global demand combined with a resilient, employed consumer will help create a floor. While inflation has likely peaked for this cycle, I believe it will remain stubborn given labor shortages and global reopening demand.

Governments, faced with increasing costs due to the need to secure supply chains and increase spending for cybersecurity, defense, healthcare and climate change, will face deficits. We expect this to pressure rates, which will remain stubborn at near current levels – even after the rate increases stop.

A move toward moderation seems to have started across many political, geopolitical and economic factors. Default risk will now be in focus as we work to extract the central bank safety net and uncover where the excesses reside.

In my view, this bodes well for active managers and their ability to return to analyzing cycles, credits and opportunities with far more conviction than any of us could have had during the events of the last few years.

Three questions for 2023

Jack Janasiewicz, lead portfolio strategist, Natixis Investment Managers

Solutions Three key questions need answers. And these will be critical in how markets evolve over the course of 2023. First, the obvious one: inflation. The worst is certainly behind us, but the more important question is where the structural equilibrium rate settles in the US. Should it prove to be sticky well above the 2% target expect the US Federal Reserve to tighten further than is currently discounted. A more hawkish Fed certainly won’t help restore dampened risk appetite across the globe.

Secondly, where will earnings finally settle? The market seems to be split into two binary outcomes: earnings remaining largely unchanged by year end or down another 10-15%. While consensus views a 2023 recession as inevitable, we find ourselves contemplating the old adage: “Never bet against the US consumer.” We would add another: “Never underestimate the resiliency and flexibility of corporate America.” Corporates are aggressively cutting costs to preserve margins. With cost pressures easing and demand proving resilient might that be the missing piece to the earnings puzzle that leads to a better-than-expected Earnings Per Share outcome? And lastly, after a year of synchronized global tightening, expect 2023 to be a year of policy divergence from global central banks that will certainly influence divergent regional growth outcomes.

The end of the Fed tightening cycle appears within reach while the European Central Bank remains several quarters behind, having just recently adopted the Federal Reserve’s playbook. Heading into 2023, growth momentum appears to be inflecting higher in the US while incremental downside risks appear to be building further in Europe. And in the emerging market (EM) world, many EM central banks were first to tighten. Will they now be the first to ease policy as inflation rolls over and growth moderates? China has fully committed to reopening, and while this process will be non-linear, it does appear irreversible. And in doing so, the People’s Bank of China looks set to continue down a path of completely asynchronous monetary policy relative to the rest of the world – an easing one. Nuance will matter again in 2023 after a year that was one big one-way rates trade.

Uncertainties remain but select sustainable equities look attractive

Mirova Global Sustainable Equity Fund portfolio management team

Looking ahead, we expect continued volatility in equity markets in 2023, driven by many of the same issues markets faced in 2022. We expect a significant slowdown in economic activity in the first half of the year driven by central banks increasing interest rates to fight inflation. We continue to work under the assumption of higher inflation for longer, which is likely to lead to recession in both Europe and in the U.S. The situation in Asia is a bit different and, however fragile, the reopening of China’s economy may help ease global supply chain constraints and support economic growth.

We think many central banks will continue to raise interest rates to fight inflation at least in the beginning of the year, impacting short-term interest rates. The good news is we believe we may have already seen an inflation peak in the U.S. at the end of 2022 and may be nearing the peak in Europe and other regions, meaning the probability of higher long-term interest rates is quite low. That said, as a fallout of the Russia/Ukraine war and the pandemic, we believe that inflation will be higher than it has been historically and for longer, buoyed in part by shifting supply chain practices.

Here are several sustainable investment themes in 2023:

1. Shifting global supply chains should lead to more opportunities related to industrial automation and optimization of industrial processes across industries.
2. Energy and energy security – Short-term solutions such as importing liquid natural gas from other countries will likely be used in response to the Russia/Ukraine conflict and the potential for Russia to leverage its oil and gas supplies to apply political pressure. But, longer term, renewable energy – such as wind, solar, and large-scale solutions such as hydrogen – is the only solution for Europe’s energy security and can make the region truly energy independent, although it will take time.
3. Passage of the Inflation Reduction Act in the U.S. – The path ahead for an environmental transition in the U.S. seems clearer for the time being and should strengthen the growth tailwinds for companies that are well exposed to these themes.
4. Biodiversity and food systems – In December at the COP15 United Nations Biodiversity Conference in Montreal, more than 190 nations adopted a landmark agreement to protect and restore biodiversity, including a pledge to protect 30% of land and oceans by 2030. We expect this to lead to greater awareness of biodiversity-related risks and opportunities across industries, in particular solutions for sustainable land management and food production, ingredients and bioscience, water technology and sustainable packaging.

Multiple challenges face equity markets

Chris Wallis, CEO and CIO, Vaughan Nelson Investment Management

The 2022 equity bear market reflects the impact of higher interest rates increasing the cost of capital and therefore decreasing equity valuations. The next challenge for markets will be digesting the reduced earnings expectations for 2023. The largest reduction in earnings expectations should occur during the first two quarters of 2023.

A second half recovery for 2023 will be contingent on the interplay between the rapid deceleration in inflation and whether higher interest rates lead to excessive economic and market weakness. With the current level of interest rates and expiring monetary and fiscal stimulus, we anticipate that by the third quarter of 2023 the trajectory of inflation will be on pace to meet the Federal Reserve’s inflation target.

However, we do expect that tighter financial conditions and expiring monetary and fiscal stimulus may lead to an earnings recession and likely an economic recession. Should weakening economic and financial conditions force policy makers to re-stimulate the economy, we could see inflationary pressures begin to reaccelerate in 2023.

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All investing involves risk including the risk of loss. This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of January 9, 2023 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

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