in Unpredictable Markets
Investors are bracing for more volatility in 2023 as markets adapt to an investment landscape altered by runaway inflation, interest rate hikes and geopolitics.
While this does not mean a repeat of 2022, we think investors would be well placed to withstand further market ructions by staying LIQUID in unpredictable markets—i.e., being flexible and adaptable like liquid, so one can conform or adjust to any situation at hand.
Coined after the watery substance, the acronym also refers to what AB views as its key themes for 2023: Low Volatility; Inflation; Quality; US Assets; Income; and Diversification.
Extreme market volatility has kept investors on the sidelines. While cash may be used for mitigation, it suffers from an inflation penalty and will not capture a market rebound when it inevitably arrives. Instead, there are solutions across and within asset classes to help mitigate volatility and capture long-term return potential.
Persistent inflation has prompted central banks to tighten monetary policy and raise interest rates at an unprecedented pace, driving down valuations premised on low interest rates. Generating a satisfactory level of income has become a challenge, causing investors to revisit their asset allocation and look for strategies that will deliver meaningful real return in such an environment.
Inflation and low unemployment have pushed the US Federal Reserve into dramatic rate hikes that may trigger a recession, while Europe’s energy crisis and China’s embattled property market risk making such a downturn global. However, earnings resilience has been key in helping companies withstand recessions, and high-quality portfolios have typically outperformed in tougher markets.
In times of heightened volatility, investors have historically turned to US assets, which are perceived as more stable and provide better risk-adjusted return than other investments. The US dollar, for instance, is one of the world’s top reserve currencies and tends to outperform during bouts of risk aversion, while the US economy is seen as a place for investment.
As inflationary pressures and economic growth moderate, longer duration and high-quality bonds could return to investor favor. Within credit markets, attractive yields, lower corporate borrowings and low refinancing needs can create compelling income opportunities across well-diversified bond portfolios and multi-asset income portfolios.
This goes beyond stocks and bonds. A diversified portfolio comprising alternative return sources and a variety of asset classes can weather different market conditions, smoothen the impact of market volatility and reduce the likelihood of sharp drawdowns better than individual investments. As such, diversification has an important role to play in improving investor outcomes.