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December 2022 / MARKET OUTLOOK

The Need for Agility

A time to be selectively contrarian


  • Central bank efforts to tame inflation have reached a critical point. In 2023, investors will be looking for the peak in interest rates.
  • U.S. earnings growth estimates may be too optimistic. But we see relative valuation advantages in some equity sectors and in non-U.S. markets.
  • The worst bond bear market on record pushed yields to some of the most attractive levels since the global financial crisis. Investors appear to have noticed.
  • The threat of global economic decoupling has been exaggerated, but big structural changes are in progress. We see opportunities amid the disruptions.

Heading into 2023, capital markets appear to have priced in a significant global economic slowdown. The key question is whether this deceleration will end in a “soft landing”—with slower but still positive growth—or in a full‑fledged recession that drags down earnings.

Much depends on the U.S. Federal Reserve (Fed) and the world’s other major central banks as they continue efforts to bring inflation under control by hiking interest rates and draining liquidity from the markets.

“History is not on our side,” says Sébastien Page, head of Global Multi‑Asset and chief investment officer (CIO). “Fed hiking cycles don’t generally end well, especially when inflation is running high.”

But investors shouldn’t assume a deep downturn is inevitable, Page adds.

Although some leading indicators have weakened (Figure 1), U.S. employment was still growing in late 2022. Corporate and household balance sheets appeared strong. And the economic wounds inflicted by the COVID pandemic continued to heal, notes Justin Thomson, head of International Equity and CIO.

Geopolitical risks will remain potential triggers for downside volatility in 2023. Structural factors, such as bank capital requirements that constrain market liquidity, could magnify price movements, both up and down.

With most central banks seeking tighter financial conditions, investors can’t count on them to intervene if markets fall, warns Andrew McCormick, head of Global Fixed Income and CIO.

“We’ve come out of a period where central banks had strong motivation to suppress volatility,” McCormick says. “Now, policy is aimed at tightening financial conditions. So there is no buyer of last resort when markets come unhinged.”

But excessive pessimism and volatility can create value for agile investors, the CIOs note. An attractive point to raise tactical exposure to equities and other risk assets may appear in 2023, Page predicts. However, as of late 2022, it had not yet arrived, in his view.

Until it does, Page favors a “selectively contrarian” approach of tilting toward specific sectors within asset classes— such as small‑cap stocks relative to large‑caps and high yield relative to investment‑grade (IG) bonds.

In difficult markets, security selection will be critical, Page says. “Active management skill is just incredibly important in this environment.”

Leading Indicators of Economic Growth Are Fading

(Fig. 1) Purchasing Managers’ Index Levels for Manufacturing

Leading Indicators of Economic Growth Are Fading

As of November 2022.
Sources: Institute for Supply Management/Haver Analytics, J.P. Morgan/IHS Markit, Bloomberg Financial L.P. (see Additional Disclosures). Data analysis by T. Rowe Price.


Explore our four themes:

An Economic Balancing Act
Aggressive rate hikes are slowing economic growth. But a deep downturn across the globe is not inevitable.

Leaning Against the Wind
In the face of challenging headwinds, a careful contrarian approach could offer potential for investors.

The Return of Yield
Yields are appealing in select markets and buying opportunities exist, but investors will need to be mindful about volatility.

Deglobalisation in a Connected World
We are seeing a shift in the global economy that could shape the investment landscape for years to come.


Read our full 2023 Global Market Outlook (PDF)



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December 2022 / MARKET OUTLOOK

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With volatility ahead, agility can be a great source of opportunity

By Justin Thomson & Sebastien Page

By Justin Thomson & Sebastien Page