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As we venture into the second half of 2023, what’s in store for financial markets?

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Moving into the second half of 2023, the impact of higher interest rates and the uncertain economic backdrop are likely to remain key concerns for investors. M&G Investments assesses the main factors driving the equities, fixed income, and private markets, and highlights the potential opportunities for selective, diversified investors.
As we venture into the second half of 2023, what’s in store for financial markets?

An eventful start to the year

If policymakers’ aggressive response to high inflation was one of the principal drivers of financial markets last year, uncertainty about the consequences of higher interest rates has dominated so far in 2023.

There has been plenty of debate about how central banks’ rapid monetary tightening might affect the path of economic growth — will we have a ‘soft’ or ‘hard’ landing, for instance — and how markets might react.

Despite this challenging backdrop, and other concerns such as the US debt ceiling, markets, particularly equities, have been surprisingly resilient. Apart from US banks and energy stocks, which have been hit by the banking crisis and weaker oil prices respectively, many stock markets have been steadily recovering some of last year’s declines. US mega-cap technology stocks, in particular, have soared this year, driven by excitement about the potential of Artificial Intelligence (AI).

Fixed income markets have generally registered positive returns too, albeit with periods of volatility and weakness in specific parts of the market, notably longer-dated gilts. However, commodity markets have faced a more difficult backdrop with the uncertain economic outlook and concerns over slowing Chinese demand weighing on energy and copper prices. In contrast, gold has benefited from its traditional ‘safe haven’ attributes and registered solid returns in the first half of 2023.

A perspective from equities and multi-asset: Take nothing for granted

Fabiana Fedeli, chief investment officer, equities, multi asset and sustainability, believes markets will remain preoccupied with ongoing central bank decisions and the likelihood, timing and depth of a recession. For Fedeli, the market remains one where selection is the main driver of alpha, diversification is key and volatility has to necessarily become our friend. She currently sees compelling opportunities in Japan for active, engaged investors, due to a culture of self-help and corporate reform, as well as selective opportunities in China.

A perspective from fixed income: Valuations have been reset

Jim Leaviss, chief investment officer, public fixed income, believes that there is a lot of value in bond markets currently. In his view, bond investors are being well paid to take both interest rate and credit risk. Leaviss thinks inflation is likely to remain the key driver of returns. Although core inflation remains elevated, he feels we could be past the worst, and this will allow central banks to bring the current rate hiking cycle to an end. However, he warns that the rapid rate rises we have seen could cause an economic slowdown. Within core government bond markets, Leaviss favours US Treasuries. He also sees attractively valued opportunities among emerging market bonds.

A perspective from private markets: Positive trends remain in place

Private markets, just like public markets, such as private credit, real assets and real estate markets face challenges from the new investment landscape. Investors will clearly need to consider the impact of higher funding costs on deals and investment returns. However, M&G Investments remains confident that the outlook for private market investing is positive, with investors attracted by a combination of high yielding (often floating rate or inflation-linked) assets and growth opportunities. Long-term trends such as the broadening and democratisation of the investor base and growing interest in sustainability and impact investing also represent exciting opportunities for private assets, in the company’s view.

Watch M&G Investments 2023 mid year investment perspective outlook:

In this video, Fabiana Fedeli, CIO equities, multi asset and sustainability, and Jim Leaviss, CIO public fixed income, find value in bond markets, stockpicking in an uncertain macro environment and the potential for big surprises in Japan.



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