Northern Trust 2023 Outlook: Markets and Economy Pivot from Inflation and Monetary Policy Fears to a Weak Global Economy

Central Banks to Pause Rate Hikes as Inflation Declines ... | December 19, 2022

Northern Trust 2023 Outlook: Markets and Economy Pivot from Inflation and Monetary Policy Fears to a Weak Global Economy

Northern Trust, a global asset manager that manages US$1.2 trillion, anticipates 2023 to be turbulent. The firm expects conditions to shift from inflation and monetary policies fears to a weak world economy. However, it also expects market volatility will moderate due to lower inflation levels and a pause on central bank interest rate rises. It is unlikely that rates will be reduced.

Angelo Manioudakis, Northern Trust Chief Investment Officer, stated that while there is some downside risk to fundamentals, the potential upside from improved investor sentiment is evident. "Financial markets will need to balance the immediate disappointment of global growth with the backdrop of greater certainty about central bank policy, a decrease in interest-rate volatility, and the potential for growth later in the calendar year.

Change among Constants

These changes are the reason why Northern Trust's 2023 Outlook is stating that it will be an 'important' year, even though some conditions may remain.

According to the firm, global growth will remain constrained with some regions already in recession and others at the edge of collapse. The firm also believes that China's transition from pandemic to endemic will continue to have a material impact on global economic demand.

Outlook Driven by Investment Topics

The 2023 Outlook by Northern Trust builds on the firm’s long-term Capital Market Assumptions report (CMA), which is a forward-looking and historically informed five-year forecast that guides its strategic asset allocation recommendations. The CMA's core is made up of investment themes. These are typically five to six investment themes based on the forces Northern Trust believes will drive markets in the next five-years. The 2023 Outlook reflects the six themes of the August 2022 CMA. They include 'Slow Growth Transitions', 'Inflation Rebalalibration' and "Monetary Drought."

The Outlook 2023 also contains forecasts for a variety of asset classes.

Fixed Income with high yield is preferred

Northern Trust believes that most of the rise in interest rates will be behind us. However, the pace at which inflation falls is going to determine the rate path moving forward. Given the limited upside and ongoing volatility of interest rates, Northern Trust maintains a neutral view on duration risk. Given the firm's preference for credit risk, especially in the high yield space due to solid yields and decent foundations, even during a recession, it is not opposed to credit risk. High yield is still the highest conviction tactical overweight for the firm according to its Global Policy Model. This model presents the firm's asset allocation recommendations. Despite the expectation that they will return positive returns in 2023, investment grade bonds are the most underweight.

Equities Reset in the Face of Weak Economic Growth

Chris Shipley, Northern Trust Asset Management’s chief investment strategist in North America, stated that equity valuations should not be a major headwind in 2023. "However, we expect 2023 will be volatile for equities around the world as economic growth and corporate profits disappoint. However, sentiment improves as inflation trends decrease and central banks eventually halt their rate hike campaigns. These cross-currents have left us equal-weight in developed market equities according to our Global Policy Model but we are underweight in emerging market equities due to the short-term challenges.

Natural Resources continue to play an important role

Northern Trust believes that real assets will provide diversification benefits for investors in the same way as real assets in 2022. This is especially true for natural resource. "Specific to natural resource, we have reaffirmed an overweight given their solid foundation outlook and the manner in which they can act against an emerging market rebound," said Wouter Sturkenboom of Northern Trust Asset Management, chief investment strategist for Europe and the Middle East, Africa and the Asia-Pacific region. "Natural resources were the kings of 2022 and will continue to play a significant role in 2023," said Wouter Sturkenboom, Northern Trust Asset Management's chief investment strategist for Europe, the Middle East, Africa and Asia-Pacific.

The full Northern Trust 2023 Outlook is available at

Forward-looking statements or assumptions represent Northern Trust's current expectations or predictions of future events and future results. They are not meant to be used as a guarantee or estimate of the results that a portfolio will achieve. Actual results may differ from those indicated in this information.

Capital Market Assumption's (CMA), model expected returns don't reflect actual performance. They are intended to be illustrative only. These expected returns do not reflect future trading, liquidity constraints, fees and expenses or other factors that could affect future returns. An investor's actual return may be different from what they expect. All forecasts, assumptions, techniques, and views mentioned are subject to change without notice. All forecasts are round to the nearest whole number.

This material is intended only for professional clients and is not meant to be used by retail clients. This information is intended for informational purposes only. This information is not meant to be, and should not, be construed to be, an offer, solicitation, or recommendation with regard to any transaction. It should not also be considered as legal advice, tax advice, or investment advice.

Northern Trust Asset Management

Northern Trust Asset Management, a global investment manager, helps investors navigate the changing market environment so that they can achieve their long-term goals. We are entrusted with US$999.1 million of investor assets as of September 30, 2022. We understand that investing ultimately serves an even greater purpose and believe that investors should be compensated for any risks they take in any market environment and investment strategy. We combine solid capital markets research, portfolio construction expertise and risk management to create innovative and efficient solutions that achieve targeted investment outcomes. We consider it an honor to be active contributors to our communities and serve our investors with integrity, respect and transparency.

Northern Trust Asset Management consists of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers(Ireland), Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited & The Northern Trust Company.

About Northern Trust

Northern Trust Corporation (Nasdaq : NTRS), is a leader in wealth management, asset servicing and asset management. It also offers banking services to individuals, families, corporations and institutions. Northern Trust has been a leader in the financial services industry for more than 130 years. It is known for its exceptional service, financial expertise and integrity, as well as innovation. Visit Follow us on Twitter @URL_ and Northern Trust Corporation on LinkedIn.

Northern Trust Corporation, Head office: 50 South La Salle Street Chicago, Illinois 60603 U.S.A. URL