A tale of two halves 2023 investment outlook: U.S. Bank
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2023 investment outlook:
A tale of two halves
Executive summary spending. Businesses may, in turn,
Quarterly Outlook We anticipate a choppy 2023 start giving anticipate weakening consumer spending
way to a more favorable investment and limit expansion plans. As the economy
Contributors from environment later in the year. The year’s endures higher borrowing costs, corporate
U.S. Bank Asset first half centers on the U.S. Federal earnings may be challenged relative to
Management Group: Reserve (Fed) and other central banks’ current estimates.
policy resolve, with investors weighing
Eric J. Freedman The content below reflects U.S. Bank’s
how stringent policymakers will be given
Chief Investment Officer investment views through a global lens.
recent interest rate hiking trends. Central
While we do anticipate some potential
Kaush Amin, CFA banks face a challenging backdrop, with
volatility as we begin the new year, the
Head of Private Market inflationary pressures remaining above
Investing pendulum can always swing too far and
historic levels but economic growth
we see several opportunities for patient
demonstrating slowing conditions, risking
Thomas M. Hainlin, CFA investors. As always, please do not hesitate
National Investment Strategist central banks increasing borrowing levels
if we can answer any questions tied to your
into a weakening economy.
Robert L. Haworth, CFA unique situation and our best wishes to you
Senior Investment Strategy We have shared a two-staged investment and yours in the new year.
Director framework to explain current capital
market reactions. The first stage reflects Global economic views
William J. Merz, CFA
how markets react to interest rate changes, Interest rate increases and inflation
Head of Fixed Income Research
and the second anticipates how the pressures are weighing on the
Terry D. Sandven economy adjusts to higher interest rates’ United States and foreign developed
Chief Equity Strategist cumulative impact. When central banks economies as we enter 2023.
target higher interest rates, newly issued
Chad Burlingame, CFA, CAIA A conclusion to interest rate hikes should
Head of Impact Investments government bonds reflect elevated yields,
provide benefits into 2023’s year-end,
forcing other assets to reprice lower. With
especially should inflation pressures ease.
Kevin T. Weigel, CFA persistent interest rate hiking campaigns
Senior Research Analyst, China’s battle against COVID-19 continues,
and relatively consistent central bank
Real Assets which should limit growth to start the year.
communication, we may be mostly through
Over the latter half of the year China could
the first stage.
see a recovery should the government
Our near-term caution rests within the implement a vaccination program and
This informational material
second change. Higher interest rates ease its zero-COVID lockdown practice to
is provided by U.S. Bank
Asset Management Group reflect higher borrowing costs that act reopen the economy.
who provides analysis and like a tax to credit-reliant consumers and
research to U.S. Bank and businesses. Although the labor market The U.S. economy is likely to struggle
its affiliate U.S. Bancorp remains strong and job openings exceed at the outset of 2023 due to Federal
Investments. Contact your Reserve (Fed) interest rate hikes, though
jobs sought, low labor force participation
wealth professional for slower inflation should help a second
more details. and reduced savings may thwart consumer
Investment products and services are:
NOT A DEPOSIT • NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY2023 investment outlook
half recovery. weather could drive prices higher, or second-largest economy — remains
Accumulated Fed interest rate hikes even require rationing available gas under pressure; consumer spending
and souring consumer and business as Russian embargos limit supplies, growth remains modest and deposits
sentiment weigh on economic growth pressuring the region into a recession. are rising while the housing market
as we open 2023. While the labor Additionally, interest rate increases remains in recovery from excess
market remains solid, spending is from the European Central Bank inventories and homebuilder distress.
unlikely to keep pace after consumers and the Bank of England likely hurt Interest rate cuts and targeted housing
maintained robust spending on growth prospects for much of the market stimulus should eventually
experiences in 2022. Two additional year. Any resolution to the Russia/ support recovery. However, overall
headwinds include a slowing housing Ukraine conflict is a positive for the Chinese growth is likely to remain
market and weaker equity prices, global economy and a conclusion to modest for the full year. A pivot from
which are both empirically linked sanctions could ease global supply its zero-COVID policy, to combat the
to spending tendencies. Negative issues. spread of coronavirus outbreaks, and
economic growth is a risk should distribution of an effective mRNA
The Bank of Japan alone maintains vaccine in China should lift growth
unemployment rise or inflation spike,
its near-zero interest rate policy in the back half of 2023, perhaps
damaging consumer spending.
and continues to purchase assets rekindling some inflationary pressures
The slower economy should soften to stimulate its economy and as consumer spending rebounds.
inflation pressures into 2023’s spark inflation, despite continuing
second half, when investors expect headwinds of an aging and declining U.S. equity markets
the Fed to stop interest rate hikes population. These measures appear
likely to pay off modestly in 2023 The potential for an economic
and perhaps cut rates by as much
as the economy benefits from its slowdown or recession and lower
as half a percentage point by year-
recovery from deflation and improving 2023 earnings forecasts tempers our
end. An end to interest rate hikes
consumer spending prospects in the optimism for meaningfully higher
should allow consumer and business
wake of wage increases. equity returns in the new year.
spending to stabilize, driving a small
economic recovery. Any resurgence We view U.S. equities’ return
in inflation pressures, especially a China’s economic prospects prospects as positive but muted
spike in commodity prices, could hurt remain linked to a recovery from relative to the S&P 500’s 12.3%
economic prospects into year-end. coronavirus practices, while major historical average annual total return
Alternatively, more robust business commodity exporters among (including price appreciation and
spending, especially if companies seek emerging market economies may dividends) from 1926 through 2021.
to resolve supply chain challenges, see softer growth on weaker prices. The lagged effects of Fed rate hikes
could lift the economy more than Emerging market economies and a declining fiscal impulse from
anticipated. continue to see disparate trends in a newly divided Congress amid a
their recovery. Global manufacturers slowing economy increases the
High energy costs will likely hold may remain under pressure until the prospects for a recession in 2023,
foreign developed economies in developed world rebounds from representing a headwind to overall
a recession for much of the year, global central bank rate increases. equity returns. Recent equity price
while the Russia/Ukraine conflict Major commodity exporters, such strength may signal investors’
remains a key economic swing as Brazil and South Africa, likely anticipation that inflation has or
factor. experience weaker growth due to will soon peak; however, we deem
cumulative interest rate hikes and it unlikely that the Fed will quickly
High energy costs are sapping
recent weakness in commodity prices. reverse course away from restrictive
consumer strength across Europe and
The latter half of 2023 could stabilize policies and we are doubtful that
the United Kingdom. While recession
if global commodity demand improves Congress will pass legislation
was avoided in 2022, the bill likely
on weaker prices. designed to jump-start economic
comes due in 2023. Despite full
growth.
natural gas reserves in Europe, cold
Entering the year, China — the world’s
2 See important disclosures on pages 8 and 92023 investment outlook
Inflation, interest rates and earnings suggest investors focus on companies pace. While secular-growing sectors’
growth are keys to equities’ return offering current dividend yields close near-term outlook remains challenged
potential in 2023. to the S&P 500’s current 2% rate but by central banks’ determination in
Inflation levels and interest rates demonstrate fundamental strength to combating persistent inflation, we
influence the price investors are grow dividend payments by 10% or continue to like the longer-term
willing to pay for anticipated higher, above that of the index and the prospects for companies in several
earnings. Elevated inflation erodes inflation rate. growth sectors, taking advantage of
the purchasing power of future lower prices following 2022’s market
Companies in the Healthcare, Utilities, decline.
dividend payments and earnings
Real Estate, Consumer Staples,
streams while rising interest rates
Financials and Energy sectors, on Information Technology is one sector
make higher-yielding safer assets
balance, present relatively stable that offers longer-term appeal. Fast
such as U.S. Treasuries more
growth profiles throughout varying is getting faster, and speed, scale
attractive. Taken together, elevated
economic environments, with and efficiencies require continued
inflation and rising interest rates
many offering compelling dividend technological advancement.
cause investors to demand higher
yields and dividend growth rates. Additionally, the interaction of artificial
compensation for taking on equity
The Healthcare sector is favorably intelligence, machine learning,
price risk, paying lower prices relative
positioned to benefit from long-term e-commerce, cloud computing,
to anticipated earnings. Investors’
demographic trends such as an aging data security and analytics provide a
higher compensation demand causes
population. We favor Utilities that have platform for new tools and outcomes
the stock price-to-anticipated
an overall diversified revenue stream, that favorably position companies
earnings ratio to compress, resulting
including a bias toward renewables. within the Technology sector. We
in increased volatility and more
Many Real Estate, Consumer Staples favor Consumer Discretionary
subdued returns. Inflation appears
and Financials companies offer companies that combine an internet
likely to trend higher for longer due
products and services in demand in presence, require or encourage
to persistent wage pressures and
all economic environments. Finally, in-store traffic and rank high on
associated shortage of workers, along
Energy, while being the best- experiential metrics. Finally, we find
with ongoing supply constraints
performing sector in 2022, remains opportunities within a bifurcated
due to COVID-related shutdowns in
favorably positioned to benefit from Communication Services sector,
countries such as China.
elevated hydrocarbon prices due to split between telecommunications
the ongoing Russia/Ukraine war while and media-related companies. We
Dividend-paying and traditionally
remaining economically relevant even favor the growth-oriented media
defensive sectors retain near-
as renewables become a viable energy companies that are moving to online
term appeal when weighing the
alternative. platforms where customer targeting
prospects for a growth slowdown or
and analytics, in many cases, provide
recession.
Secular growth sectors remain well- better return potential compared to
Defensive-oriented, dividend-paying positioned for longer-term growth. traditional media sources.
equities were among the best-
Secular growth sectors, where
performing companies in 2022 and Foreign equity markets
technological advancements and
we look for this trend to continue
demographic trends drive longer- A subdued 2023 earnings outlook
into 2023. Roughly 17% of S&P 500
term demand, were among the supports our cautious stance on
companies offer dividends yielding
worst-performing sectors in 2022. foreign developed and emerging
above the 10-year Treasury yield
Higher interest rates increased market equities’ return prospects.
of 3.5%, as of December 16, 2022,
companies’ borrowing costs and
providing investors with a diverse The unsettled Russia/Ukraine conflict,
drove economically sensitive equity
opportunity set of income-oriented China’s ongoing COVID restrictions
prices lower due to reduced demand,
equities. To combat inflation’s negative and central banks tightening monetary
ongoing supply chain challenges and a
effects on fixed cash flows, we policy to combat elevated inflation
slowing revenue and earnings growth
3 See important disclosures on pages 8 and 92023 investment outlook
remain material headwinds for exceptional uncertainty emanating of goods and helping fuel global
global economic growth and foreign from the Russia/Ukraine war, analysts inflationary pressures by constraining
companies’ 2023 profit outlooks. have left foreign developed earnings goods supply relative to global
Analysts forecast a modest 1.9% 2023 estimates little changed from demand. Additionally, China’s
earnings growth across foreign the beginning of 2022. Tightening slowdown continues to weigh
developed markets and 1.0% across financial conditions for businesses and on growth prospects for major
emerging markets relative to 2022, consumers challenge analysts’ current firms providing key technological
according to Bloomberg consensus 2023 earnings growth forecasts; if and industrial goods to the global
estimates. High interest rates and analysts’ expectations prove overly economy. In response, analysts sharply
energy prices continue to erode optimistic, we remain concerned reduced 2023 earnings forecasts
consumers’ purchasing power, while about renewed asset price weakness, across emerging market economies by
high input and financing costs impair with stock prices following potentially 21%, with timing regarding a durable
companies’ profitability potential. downgraded earnings forecasts lower. zero-COVID policy easing remaining
The European Commission (EC) unclear.
recently reduced its 2023 full- China’s uncertain COVID policy
year growth outlook across its 27 path remains a two-sided variable Subdued consumer spending in the
member countries from 2.3% to just for foreign market prospects in world’s second-largest economy
0.3%, citing the region’s geographic 2023. continues to weigh on China’s growth
proximity to the war and dependence prospects as well as global export
China’s COVID policy path remains
on Russian gas imports. While the EC markets. However, a 2023 economic
a key determinant for not only its
expects year-over-year inflation to reopening would unlock China’s pent-
2023 domestic equity outlook but
peak by 2022 year-end, it stipulated up consumer demand for domestic
broader foreign markets’ prospects,
that the largest variable in its already and foreign goods and services,
as well, due to China’s economic
downgraded outlook is the risk of gas providing upside earnings potential
size and key position in global supply
shortages in the winter of 2023-2024, for emerging market firms, while
chain linkages. Restrictive zero-
highlighting the uncertainty’s depth improved supply chain transmission
COVID policies have benefited
and duration and the wide range of would alleviate global central banks’
local stay-at-home delivery services
potential outcomes in the year ahead. inflationary pressures, highlighting
but severely constrained overall
China’s COVID policy path’s two-sided
domestic activity, impairing larger
Recent positive equity price impact on 2023 outcomes.
e-commerce, financial services, and
performance warrants attention, entertainment companies’ revenue Fixed income markets
but we view the rally’s durability streams. China’s annual retail sales
with skepticism. through November were 6% above Higher starting interest rates make
After setting an all-time high on pre-pandemic 2019 levels, sharply high-quality bonds more attractive
September 6, 2021, the MSCI EAFE contrasting with U.S. consumers’ and may help portfolios amid
Index (representing 21 developed more resilient 32% spending growth slowing economic growth.
market countries across the world, over the same period. Meanwhile, High inflation and Fed interest rate
excluding the United States and China’s households have increased hikes caused significant Treasury yield
Canada) trended lower over the next bank deposits by 44% relative increases in 2022; since bonds and
four quarters, ultimately declining to 2019, reflecting consumers’ yields move in opposite directions,
31% from the 2021 peak to the spending caution and subdued future rising yields dragged down bond
October 2022 low. The 17% rally in expectations amid ongoing activity prices. Corporate and municipal bond
2022’s fourth quarter has recovered curbs. yields also rose relative to Treasuries,
nearly 40% of the peak-to-trough leading to negative 2022 returns, but
price decline, but we view recent Lockdowns of major logistics hubs
higher coupon payments improve
positive performance with some to contain local COVID outbreaks
investors’ 2023 income prospects.
skepticism. Despite challenging have entangled global supply chains,
Near-term, higher trends in Treasury
macroeconomic conditions and hindering the normal movement
4 See important disclosures on pages 8 and 92023 investment outlook
yields continue despite indications eventually anchor long-term yields. decelerating economic growth.
of slower growth and tighter market More Fed interest rate hikes should
liquidity conditions. We anticipate place direct upward pressure on Mortgage bonds not backed by the
opportunities in longer-term bonds short-term yields and, by implication, government and reinsurance offer
may become more compelling in 2023 downward pressure on bond prices. attractive income.
if inflation slows further and economic However, high-quality short-term High mortgage rates will pressure
headwinds from restrictive Fed policy bonds are positioned to deliver housing market activity well into 2023.
and worsening liquidity conditions favorable returns in 2023 with coupon However, yields on mortgage bonds
drag on growth. payments at their highest in more than not backed by the government already
a decade. Opportunities in longer- adjusted to near their highest levels in
Tighter monetary policy may term high-quality bonds may emerge over a decade as investors reduced
remain a headwind for riskier once inflation decelerates further and allocations during 2022. Mortgage
assets, with uncomfortably high if economic growth remains under bonds remain well-collateralized when
inflation keeping pressure on the pressure in 2023. Increased demand considering home values relative to
Fed to increase rates at least into for safe-haven assets as economic loan amounts and a limited supply of
early 2023. growth slows could provide support new mortgage bonds due to falling
The Fed increased short-term funding for long-term bond prices next year. home sale transactions. These all
rates by 4.25% in 2022, and Fed Treasuries offer attractive income and represent tailwinds for mortgage
officials remain steadfast in their opportunities in long-term Treasury bonds not backed by the government.
commitment to fight inflation with bonds could improve as interest rates Reinsurance, also referred to as
further rate hikes. Treasury yields peak and the economy slows. insurance-linked securities, continues
incorporate expectations that the to offer compelling yields. Insurance
Fed’s target rate will peak around High-quality corporate and premiums (minus insured losses from
5.00% in mid-2023 then fall to 4.30% municipal bond issuers may natural disasters) drive returns and
by the end of 2023. In contrast, Fed withstand decelerating earnings remain uncorrelated with typical
officials have said they plan on holding and tax revenue growth. economic cycles that drive stock and
rates at high levels for some time to Low yields in 2020 and 2021 allowed bond returns. Losses from Hurricane
avoid premature easing of financial corporate and municipal bond Ian are leading a significant upward
conditions that may stoke inflationary issuers to lock in low borrowing adjustment in reinsurance premiums
pressures. The Fed also plans to costs. Despite a slowing economy, heading into 2023.
continue reducing its bond holdings, investment-grade issuers likely have
referred to as quantitative tightening. ample cash flows to service this Real asset markets
Allowing $95 billion in Treasury cheap debt in 2023. However, slowing Rising borrowing costs may offset
and mortgage bonds to mature earnings and tax revenue growth may positive income growth in the real
each month without reinvesting cause a modest increase in high yield estate market, hampering returns.
the proceeds may eventually strain issuer defaults, though strong credit
market liquidity conditions because Publicly traded real estate securities
fundamentals limit the prospect of a
private investors must absorb more underperformed the broader equity
significant default wave. Re-pricing
bonds in the Fed’s absentia. While market in 2022, with rising interest
risk stemming from weak investor
tighter monetary policy represents a rates offsetting positive property
sentiment remains a larger risk to
headwind to riskier assets, high-quality market fundamentals. Additionally,
corporate and municipal bonds in
bonds could benefit from a pause in recession fears affected investor
2023 given the challenging economic
rate hikes or eventual cuts. sentiment in the secular growth
outlook, although their extra income
properties (cell towers, data centers
over Treasuries should help offset
and industrial warehouses) despite
Short-term Treasury yields should potential price decreases. High-quality
positive income growth and vacancy
increase as the Fed hikes rates, but bonds tend to deliver stronger returns
rates.
slowing growth and inflation may than riskier bonds during periods of
5 See important disclosures on pages 8 and 92023 investment outlook
Nationally, vacancy rates are declining utilities, toll roads, transportation and and recessionary concerns. While
across most property types and communications infrastructure and restrictive monetary policy and
income is still growing, but at a energy storage and transportation. slowing economic growth creates a
slowing rate. Income growth likely Relatively high energy prices should challenging backdrop for traditional
tapers to more average levels in help midstream energy continue to hedge fund managers engaged in
2023 and beyond. Income relative drive above-average production. long-short investing (buying long firms
to property values rose from all-time Utilities sector earnings should get perceived having strong fundamentals
low levels in the publicly traded Real a lift as regulated companies push and underpriced while selling short
Estate market due to declining prices through price increases to offset firms deemed with weak fundamentals
and improving valuations. Credit for inflation. Coupled with declining and overpriced), tactically oriented
property investment is still available interest rates during a potential global managers who stay nimble and can
but no longer cheap. Commercial economic recession, Utilities sector trade quickly have been well suited
mortgage interest rates — borrowing returns may strengthen. for this environment. Coincidently,
costs — may be above the average the opposite approach has also been
earnings yield on Class A property After strong gains in 2022, profitable; trend-following, which
(typically the highest-quality buildings decelerating global economic seeks to capture longer-term price
in a location). As a result, it is more growth and slowing inflation should momentum, was one of the best
difficult for investors to find quality pressure commodity prices. performing strategies in 2022.
investments. More pronounced deceleration in
Macroeconomic uncertainty favors
global economic growth to open 2023
In 2023, decelerating economic defensive positioning with less
provides a challenging backdrop for
growth should be a negative for overall exposure to the equity and
commodity prices despite relatively
property prices, especially in the credit markets. While we anticipate
tight supplies. The unfortunate conflict
private markets. Private real estate hedge fund defensive posturing will
between Russia and the Ukraine drove
appraisals are slow to adjust to continue, we do not conclude that
higher commodity prices in 2022,
the shifting economic tides, and hedge fund managers will avoid risk
but resultant demand destruction
we believe 2023 will bring price in the year ahead. Low overall net
from these higher prices hurts
pressures. This is especially true with exposure (the difference between
2023 prospects. Should the Federal
office and retail properties; excess the aggregate value of the portfolio
Reserve pause rate hikes, perhaps
capacity makes it highly unlikely invested long less the portfolio
in the second half of 2023, prices
landlords can raise rents to offset invested short) reduces a hedge
could rebound, given limited recent
declining income growth and rising fund’s sensitivity to broad market
investment in productive capacity.
vacancies. Publicly traded real estate movements, providing managers
Additionally, current inventories for
investment trusts (REITs), on the with a defensive starting point from
oil, industrial metals and even grains
other hand, re-priced significantly in which to tactically lean net long or
remain low relative to the past decade,
2022 and now trade at cheaper levels short and pursue high conviction
with a demand recovery supporting
relative to their fundamentals. opportunities. Changing credit quality
prices.
as the economic cycle continues to
A slowing economy creates an unfold highlights fixed income as one
Alternative investments
opportunity for infrastructure market opportunity we see in the
assets paying consistent dividends. Hedge fund managers continue to year ahead. As credit downgrades
Decelerating growth and inflation navigate market dislocations for increase (credit ratings agencies lower
in 2023 likely mean investors prefer opportunities. borrowers’ creditworthiness due to
investments with consistent and The capital market landscape remains deteriorating fundamental conditions),
growing cash flows, such as global rapidly evolving amid numerous hedge fund managers skilled at
infrastructure. Global infrastructure undercurrents, including rising trading around credit events will have
includes companies operating in interest rates, persistent inflation, ample chances to generate profits.
We also anticipate a greater number
6 See important disclosures on pages 8 and 92023 investment outlook
of idiosyncratic credit opportunities broad price declines as short-term Finally, private market fund managers
to surface, including distressed interest rates represented by two-year are operational experts in their
debt, where managers invest in Treasury yields rose from 0.7% at the respective investment focal areas,
securities of companies otherwise beginning of the year to 2022’s peak helping companies better adjust to
unable to refinance their debt or 4.7% rate. In response, other riskier changing economic conditions.
meet restrictions on existing debt asset classes repriced lower to reflect
covenants. the increased competition from safer We anticipate continued slowing
assets’ higher yields. in private markets activity toward
We continue monitoring the current long-term averages from the heady
difficulties challenging fundamentally Meanwhile, private markets generally levels of 2021.
focused hedge fund strategies exhibited resilience relative to
Overall, private market activity slowed
that hold securities for longer to public markets during this phase
substantially in 2022 compared to the
unlock value. This approach has of asset repricing. Private market
record levels achieved in 2021’s fourth
been favorable in recent years, asset valuations had increased less
quarter. For example, global mergers
especially among the sectors with compared to public markets as
and acquisitions (M&A) deal volume
a high degree of price momentum prices peaked in 2021 and private
declined by 29.8%, according to
and turnover in winners and losers, equity-owned business fundamentals
Pitchbook, a private markets data and
such as Information Technology and remained buoyant, delivering
research firm. Deal announcements,
Healthcare. We see longer-term continued growth in revenues and
a leading indicator for future deal
value in such strategies and market profits and essentially “growing into
activity, slowed over the course of
dislocations present equity hedge their valuations.” However, if economic
2022 and suggest M&A activity will
fund managers with investment conditions deteriorate further in
continue to cool further in 2023.
opportunities in their respective 2023, we anticipate private company
Additionally, the disconnect between
sector focal areas. Biotechnology revenues and profits will come under
sellers’ and buyers’ perceptions of
stocks represent one example, largely pressure and asset prices to decline,
company values in an uncertain
abandoned in 2022 but presenting an akin to public companies’ price
economic environment impedes
attractive opportunity set for hedge trajectory.
robust deal activity. We anticipate
fund managers specializing in the
Several factors could mitigate private M&A activity to slow toward historical
Healthcare sector in 2023. Finally, we
markets’ downside under such levels as sellers adjust to current
remain positive on macro strategies’
conditions. First, fund managers valuations and the path of economic
forward prospects, both discretionary
raised substantial capital that remains conditions becomes apparent.
(based on managers’ outlooks for
various asset classes) and systematic undeployed in the private markets; the
According to Pitchbook, private
(based on quantitative rules to identify industry term for this is “dry powder.”
market fundraising activity declined
trend persistence or reversal), due Fund managers raised large capital
32% year-over-year as of September
to anticipated changes in economic pools as strong historical performance
30, 2022, and Pitchbook anticipates
growth rates, interest rate levels and drew greater investor interest. This
fundraising will remain soft through
currency values. private equity dry powder stands at
2023 as investors digest higher
$1.2 trillion, according to CB-Insights,
interest rates and assess portfolio
Private markets and provides private companies
price declines. Initial public offering
with a liquidity source to shore up
Private markets were resilient (IPO) activity declined by 44% over
balance sheets or to fund expansion
through the first leg lower in riskier the first three quarters, according to
initiatives in growing markets at more
asset prices but are not immune if Renaissance Capital. Reverse special
attractive prices. Relatively strong
economic conditions deteriorate purpose acquisition company (SPAC)
balance sheets represent a second
further in 2023. mergers — whereby a publicly traded
support factor, with cash on hand
SPAC merges or acquires a private
Fed interest rate hikes in 2022 helping private businesses weather a
company and becomes listed on the
catalyzed public equity markets’ moderate recessionary environment.
7 See important disclosures on pages 8 and 9Quarterly Outlook
stock market — also fell by 59%, investors, while managers may find
limiting the opportunity for private opportunities to acquire otherwise
market fund managers to exit their good businesses with broken balance
investments via these channels and sheets in a special situation strategy
return investor capital. IPO markets known as “debt for control.” In private
may not recover until the economic real assets, we see compelling
outlook improves. opportunistic real estate strategies
that invest across sectors based on
Consistency and adaptability relative value differences. Finally,
continue to guide our private supply constraints in the Energy sector
markets approach. have attractive dynamics depending
Long-term secular trends in the on the investment strategy. Amid the
Healthcare and Technology sectors changing economic landscape, our
previously noted remain intact and unwavering focus on resilient business
broad market declines in 2022 models and secular transformative
provide attractive entry points for trends while being open to relative
private investors in the quarters value opportunities remains our
ahead. Early-stage growth equity and private investing north star in the year
lower middle market buy-and-build ahead.
strategies that did not experience
a glut of capital are becoming even
more interesting. Private debt offers
attractive risk-adjusted returns for
This commentary was prepared December 2022 and represents the opinion of U.S. Bank Wealth Management. The views are subject to
change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results
and is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a
primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation
or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular
situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or
completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank or U.S. Bancorp Investments
in any way.
8 See important disclosures continued on page 9U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation. Diversification and asset allocation do not guarantee returns or protect against losses. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization- weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. The value of large-capitalization stocks will rise and fall in response to the activities of the company that issued them, general market conditions and/ or economic conditions. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies and may be expected to do so in the future. Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends, which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors’ perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments. Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or such stocks may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults). Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund. Private capital investment funds are speculative and involve a higher degree of risk. These investments usually involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. 9 ©2022 U.S. Bank 888405 CR-xxxxxxxx (12/22)
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