Page 4 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer (cont.)

Over the course of the year, economic struggles and easing infla- stringent COVID policies should unleash domestic pent-up
tion will lead to a lower 10-year Treasury yield (our year-end demand—just as we’ve seen in the U.S. Energy producing
forecast: 3%). With many subsets of the yield curve inverted, inves- emerging market countries (e.g., Latin America) should rally if oil
tors should opt for quality (e.g., investment grade, municipals) over prices move higher, as we expect. Add in a weaker dollar and the
chasing more income from riskier high yield bonds. end of Fed tightening and emerging market opportunities for
both equities and bonds could hatch and grow faster than
Equities Not on the Rocks: Fundamentals Jurassic Park’s dinosaurs.
Won’t Fossilise
Surviving the Volcano: Don’t Touch
With the heightened probability of a recession, some speculate the Hot Spots
that equities are headed for another rocky year. However, investors
must remember the equity market is a forward-looking indicator. Volcanic eruptions during the Triassic era created the climate and
Yes, the P/E multiple has been chiselled away in the two previous conditions for many species of dinosaurs to emerge. But while the
years. But P/Es tend to expand as interest rates fall, and the S&P 500 destruction of some life forms led to the creation of others … it took
hasn’t notched three consecutive years of P/E contraction since at time. And time is not something every investor has on their side.
least 1994. The consensus outlook for earnings growth (the bed- Therefore, we caution most investors from speculative hot spots
rock for the rally coming out of the pandemic) has since been (e.g., meme stocks). 2023 will foster a survival of the fittest environ-
lacklustre. However, if 2022 was about businesses having pricing ment, and even though our expectation is for modest positive
power, 2023 will be the year of cost cutting. As companies enter returns in the aggregate, natural selection will run its course
preservation mode, margins will hold and, in turn, earnings will be beneath the surface. While we like to consider ourselves new age
better than previously believed. CEOs will also not turn to stone, avatars rather than cave dwellers, sometimes you need to focus on
and the shareholder-friendly activities we’ve witnessed in recent the basics and let the fundamentals lead your portfolio decisions.
years (e.g., dividend growth, buybacks) won’t cease to exist. As a Active money managers could have mammoth opportunities to
result, our year-end forecast for the S&P 500 is ~4,400. outperform, given regional, sector, industry and even compa-
ny-specific dispersion.
Excavating Opportunities: Digging in the
Emerging Markets Don’t Follow the Herd: Discover Attractive
Alternatives
Between the stronger dollar, Fed tightening, and weaker global
growth, it was harder to uncover emerging market opportunities “They do move in herds!” exclaims Dr. Alan Grant, as he witnesses
than unearthing a pearl in an archaeological dig. Investors needed brontosauruses traversing the park for the first time. But just
more than a sharp eye, handheld shovel, and a brush. But now, because herd mentality worked for dinosaurs, doesn’t mean it will
the headwinds that buried most emerging market regions under- for investors. Look at recent history. Who foresaw the pandemic or
ground have become tailwinds pushing them to the surface. the Russian-Ukraine war? It’s hardly been the Roaring '20s that
Emerging market growth is expected to outpace that of the devel- some pundits predicted just a few years ago. As we peer into 2023,
oped market by the widest margin since 2013. India’s economy market strategists are calling for a much weaker year than we’ve
has been more resilient than most. China’s decision to abandon historically seen. But investors shouldn’t blindly follow. In 2023,

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