We provide our outlook for
key asset classes in the year ahead.
Thoughts for 2023
KEY POINTS
GLOBAL RATES AND INFLATION
MULTI-ASSET
GLOBAL CREDIT
Key thoughts
CURRENCY
INVESTING RESPONSIBLY
We outline our thoughts on responsible investing, and highlight research suggesting that investors don’t sacrifice returns by investing responsibly.
3
Credit has sufficient income to achieve attractive returns even if spreads remain wide.
2
With rates remaining higher for longer, there is now a realistic alternative in credit investments to higher-risk assets or sacrificing liquidity.
1
INVESTING RESPONSIBLY
CURRENCY
INVESTMENT GRADE CREDIT
GLOBAL RATES AND INFLATION
We provide our thoughts on the growing debate around ESG investment.
Insight commissioned an independent study into how ESG factors impact performance in fixed income,
which concluded that enhancing the ESG profile of a European fixed income portfolio would not have
undermined performance over the 10 years investigated.
Emerging markets potentially offer a way to maximize impact.
The US dollar has gained significantly in 2022, reaching multi-decade highs. We believe this trend may be drawing to a close, making it a good time to review hedging policies.
Source: Bloomberg, US Federal Reserve, October 2022. Trade weighted US dollar is the US Fed Trade Weighted Real Broad Dollar Index.
Trade weighted dollar is at the highest level since the 1980s
Source: Insight, Bloomberg and Bank of America, October 2022. Global investment grade universe represented by ICE BAML Global Corporate index (G0BC).
Absolute yields are back at levels where meaningful income returns can be generated
For the first time since before the global financial crisis, it is potentially possible to achieve long-term return objectives via income alone..
With yields at a significant premium to other credit markets, we explore three reasons high yield bonds may be less risky than commonly perceived.
Source: FRED, Insight calculations, September 2022.
US consumers have significantly delevered
US consumers appear well placed to weather recession, and US consumer backed debts make up the largest and deepest segment of secured finance markets.
Source: Insight. For illustrative purposes only. Equity value parity refers to the value in equity shares a convertible bond holder would receive when converting the bond into equity.
Convertibles combine the potential for equity upside with bond-like downside protection
Convertibles may be a way to participate in any future equity market recovery while benefiting from bond-like structures in the event of further downside.
Markets are pricing in rate cuts, but we believe they will be disappointed, with rates to plateau at a higher level through 2023.
The level of rates means that investors now have a way to generate returns using bonds without being forced into higher risk assets.
Inflation appears to have peaked globally, but is likely to remain sticky above central bank targets.
Source: Federal Reserve, Bloomberg, December 2022.
Markets are already pricing in US rate cuts in 2023
HIGH YIELD
SECURED FINANCE
CONVERTIBLE BONDS
US MUNICIPAL BONDS
GLOBAL RATES AND INFLATION
Source: Insight and Bloomberg, October 2022.
Muni yields have been dragged upwards with other fixed income assets
INVESTMENT GRADE CREDIT
HIGH YIELD
SECURED FINANCE
CONVERTIBLE BONDS
US MUNICIPAL BONDS
CURRENCY
INVESTING RESPONSIBLY
Default rates in high yield are very high
High yield myths versus reality:
MYTH
Source: Bloomberg, Insight calculations; Bloomberg US High Yield Corporate Index, 15 years to 09/22.
Source: Bloomberg. Weekly ETF volumes (as a percentage of cash bonds) between 08/19 and 08/22.
For illustrative purposes only.
Default rates have probably been lower than you think
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
DISCOVER MORE
READ FULL REPORT
Discover the full 2023 outlook
READ FULL REPORT
REALITY
Annual default rate of just 1.5%
1
MYTH
Negative returns when yields rise
REALITY
1
Positive returns in all rising-yield environments since 2005, except 2022
MYTH
2
Poor liquidity
REALITY
ETF volumes increased to c80% of cash trading volumes in 2022
Four advantages municipal bonds have over corporate credit:
1
Default rates have historically been low
2
Credit ratings have historically been more stable
3
Revenues have built in inflation protection
4
Investment could have benefits for European insurers
Asset class outlook for 2023
1
2
Investment grade credit
We provide our thoughts on the growing debate around ESG investment.
Click the button to reveal the outlook for each asset class.