By Sunil Krishnan, Head of Multi-Asset Funds, Aviva Investors

The big story for investors was the worst equity and bond performance since modern indices began, set against higher cash rates and inflation levels not seen for 30 years. This hurt portfolios and raised five key questions on what investors should look out for in 2023.

1. If inflation was dominant in 2022, what does it mean for returns in 2023?

The good news: inflation should peak in the next few months, as evidenced by slowing goods price inflation and energy prices.

The bad news is that investors may still be underestimating the risk inflation gets stuck on the way down, leading to renewed rate rises that could hamper earnings.

Over the next few quarters, we don’t expect a return to the negative correlation between equities and bonds unless a deep economic downturn leads to much lower rates – a possibility in 2023 but not our base case.

2. Is high risk less risky than low risk?

For over a decade, bonds were the obvious choice for investors looking for assets less volatile than equities.

But 2022 was one of the worst ever years for bonds. While bond markets will remain volatile, we expect 2023 to be better.

Although there is still some two-way risk to bonds – for instance if investors are disappointed that central banks fail to deliver rapid rate cuts – the asset class is now in a position of much better value. And one of the nice features of bonds is that, when prices drop, leading to a rise in yields, it mechanically leads to an increase in expected returns.

3. Is the 60/40 approach broken?

If your expectation is that bonds will rally every time equities wobble, then yes, the 60/40 model is broken. Central banks no longer have the freedom to cut rates to cushion the stock market every time it falls.

However, our view is bonds are likely to behave better and provide steadier long-term returns. This means a 60/40 strategy will still comprise assets that are very liquid, generally inexpensive to get exposure to, and less than perfectly correlated. That brings useful diversification.

Equities remain key to long-term wealth creation, but the associated noise could be high in the near term, so it will be important to be selective.

4. How do you protect against inflation?

Not all inflation is the same. Investors need to be adaptable, rather than setting a strategy and assuming it will work for all kinds of inflation. Cash is valuable, despite its negative real interest rate, because it helps with the readjustment and reorientation of portfolios. Being able to put cash to work at the right time is a useful weapon.

It is also worth diversifying, not naively, but by taking exposure to assets better positioned for an inflationary and volatile period, such as absolute return funds. We also like equity sectors that enjoy good pricing and support for margins, like healthcare and energy.

5. What should investors expect for global growth?

From a UK and European perspective, it is not about whether a recession might happen but if we are already in one. Confidence data are consistent with an economic contraction, and notable forecasters such as the Bank of England expect we will remain in this state throughout 2022.

In contrast, the US has proved resilient, boosted by strong household and company balance sheets. In 2023, the call on a US recession feels 50/50, although earnings could be challenged.

In China, the gradual easing of zero-Covid policies should be noticeable in economic activity by the second quarter of 2023. That should provide support for demand globally and limit the scope for a deep downturn.

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL) as at 17/01/23. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In the UK this is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. 373297 – 31/12/2023.