Volatility is expected to persist over the next year, according to predictions by Aviva Investors, as global growth continues to slow sharply and major economies enter into recession.
Aviva suggested that the anticipated downturn will be concentrated in developed economies, many of which it believes will struggle to achieve any growth in the coming months.
The firm noted that a sharp tightening of financial conditions has resulted in a considerable repricing of risk assets and significantly higher real rates.
“Global markets fell in unison in 2022 as the world adjusted to higher real rates, with the pain felt across both developed and emerging markets,” said Aviva Investors’ head of investment strategy and chief economist Michael Grady.
“The dramatic shift in cross-asset correlations was also accompanied by a significant increase in asset market volatility, most notably in bond markets, but also in foreign exchange and equities.”
According to Aviva, changing correlations have complicated investment decision-making, and the heightened volatility that has resulted is expected to continue moving forward.
“Looking ahead, we prefer to be broadly neutral in equities. Equity markets have derated through 2022, reflecting the move higher in real rates. We expect to see downward revisions to earnings expectations in coming quarters to weigh on markets as a result of the shallow recession,” Mr Grady said.
“We have a preference to be modestly underweight duration, with upside inflation risks outweighing the downside recession risks. However, the peak in policy rates is likely approaching, requiring a nimbler approach to the asset class in 2023.”
Aviva said that the full effects of the considerable amount of monetary tightening already announced will be felt next year and beyond, combined with further expected rate hikes.
“Headline inflation has probably peaked or is peaking and should fall next year, helped by a stabilisation or even decline in energy prices, but core inflation remains too high and risks persisting for longer,” the firm predicted.
Additionally, Aviva indicated that it was taking a neutral view of credit and said that it preferred to be long the US dollar heading into 2023.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
