markets & economy  |  january 5, 2023

Global Market Outlook: The Need for Agility

A time to be selectively contrarian


Key Insights

  • 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.

Andrew McCormick

Head of Global Fixed Income and Chief Investment Officer

Justin Thomson

Head of International Equity and Chief Investment Officer

Sébastien Page, CFA

Head of Global Multi‑Asset and Chief Investment Officer

Introduction: A Time to Be Selectively Contrarian

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.

Leading Indicators of Economic Growth Are Fading

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

Leading Indicators of Economic Growth Are Fading Line Graph with Text

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.

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 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.”

Investment Risks:

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.

Small‑cap stocks have generally been more volatile in price than the large‑cap stocks.

Active investing may have higher costs than passive investing and may underperform the broad market with similar objectives.

Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall.

Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities.

Diversification cannot assure a profit or protect against loss in a declining market.

There is no assurance that any investment objective will be met.

Additional Disclosures

Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2022, J.P. Morgan Chase & Co. All rights reserved.

Copyright © 2022, Markit Economics Limited now part of S&P Global. All rights reserved and all intellectual property rights retained by S&P Global.

“Bloomberg®” and Bloomberg U.S. Investment Grade Corporate Index, Bloomberg EuroAggregate Credit Index, Bloomberg U.S. Aggregate Credit–Corporate High Yield Index, Bloomberg Global High Yield Index, and Bloomberg Emerging Markets USD Aggregate Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend T. Rowe Price products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to T. Rowe Price products.

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Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of December 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Actual outcomes may differ materially from any forward-looking statements made. All charts and tables are shown for illustrative purposes only.



Next Steps

  • Discover the future we see for financial markets and how we’re investing to prepare for it in our 2023 Global Market Outlook Insights.

  • Contact a Financial Consultant at 1-800-401-1819.