Macro markets - seven key investment themes for 2023

For Professional Investors Only

Macro markets - seven key
investment themes for 2023

This year kicks off with macro markets bang in the middle of a difficult transition phase.
Positive price action in fixed income markets and stocks in October and November last year
could be interpreted as the market front running a more benign outlook for macro data and
central bank policy. But after the final round of major central bank meetings in December, our fear
is that the Federal Reserve (Fed) and the ECB have other ideas and are not yet ready to sanction
any kind of pivot. It would need inflation and economic activity indicators to continue to weaken.
As we move into this new phase, we have identified seven key macro market themes for 2023:

1. All eyes on the pivot
A meaningful pivot from the Fed becomes more realistic if labour markets soften               “If the US labour
materially (US payrolls declining towards flat, job openings falling rapidly and the            market does not
claimant report showing a meaningful increase). And then financial assets can
continue to rally. However, the counterfactual also applies. If the US labour market
                                                                                                soften, then the
does not soften, then the Fed will continue to hike the US base rate well above 5%              Fed will continue
and will not cut rates towards the end of the year. Currently, the market is dismissing         to hike the US
the concerns of the Fed, and pricing a fairly benign path for interest rates over the           base rate well
next 12-18 months: the terminal rate below 5% in Q1 and then at least two cuts of
                                                                                                above 5%.”
0.25% before year-end.

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2. China’s reopening is the real pivot
Forget the Fed pivot, this is the real pivot. One of the strongest themes right now          “One of the strongest
in global macro is China’s reopening which is gathering pace. The most obvious
                                                                                               themes right now
implication is a return of cross-border travel from the Chinese. And the timeline
for this seems to be even more accelerated than previously expected, as evidenced
                                                                                               in global macro is
by the scrapping of all quarantine measures for inbound travellers to China.                   China’s reopening
Furthermore, domestic demand in China should step up as activity and mobility                  which is gathering
rise. This will have important implications for oil and energy and will benefit                pace. The most
commodity exporters: Australia, Brazil, and Chile, to name a few. And while the
                                                                                               obvious implication
China reopening theme is a few months old we don’t believe it is well positioned
because it only started to gather steam towards the end of the year-end when
                                                                                               is a return of
investors were reluctant to allocate in size to new themes. And more importantly,              cross-border travel
there has been skepticism on this theme at every stage. There’s more to go here.               from the Chinese.”

3. Moderating Inflation
When we look at the macro data points that came out in December, there are
nascent signs that inflation is moderating in many parts of the global economy and
the latest CPI data out of the US was most encouraging. The burden of proof has
shifted heavily to macro data points in the first quarter to justify the more positive
tone and the benign path for monetary policy that has emerged in recent months.
There is an open question of whether inflation falls back to target in a relatively
short time, and there is a myriad of macro factors that present crosswinds to the
macro outlook. We have doubts that these headwinds will be superseded by the
prospect of the major central banks shifting to a rate-cutting mode. Aside from
the strong labour market, the energy crisis and demands that climate change put
on economic structures will remain important and will present new threats and
opportunities. There are also heightened geopolitical tensions and uncertainty
over how the conflict between Russia and Ukraine will play out.

4. Tight labour markets headwind
When we focus on inflation, we observe there are new factors at play in the US
that have the potential to keep wages rising and the labour market tighter than
has historically been the case. We believe that it is in one significant area, the
labour market, that there are worrying signs that slaying the inflation dragon might
take longer and require more drastic action from monetary policy than is currently
priced. Labour markets in many key economies remain concerningly tight. There is
no doubt unemployment is a lagging indicator, however, there are structural factors
at work that potentially point to labour markets remaining tighter for longer. These
factors include labour hoarding, skills shortages, reduced labour market mobility,
and declining immigration.

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5. Alternatives should provide resilience
We continue to find a strong focus on alternatives through multiple channels                 “We also find a
(wealth management, LDI, private banking and general financial institutions).
                                                                                               healthy amount
While there has been an appreciation of the degree of value creation in the long
only space, given where core yields are, and with spreads also historically attractive
                                                                                               of scepticism
in some areas, alongside that, we also find a healthy amount of scepticism that we             that we can revert
can revert to a pre-Covid world. Alternative strategies are often more flexible and            to a pre-Covid
offer more diversified sources of returns than traditional long only strategies.               world.”
In particular, proven absolute return macro strategies will remain in high demand.

6. Quantitative tightening risks heighten
Market volatility is likely to remain high. But perhaps the most important driver,
however, will be the fact that monetary policy across the globe will remain
in restrictive territory for an extended period. With many central banks also
embarking on quantitative tightening, liquidity will continue to be drained out
of the system. This global tightening of financial conditions, at a time of slowing
growth (even recessionary conditions) and rising default rates, will result in greater
dispersion in macro conditions. Good policy making will be rewarded, bad policy
making will be punished.

7. A bottom-up approach
With uncertainty high, and crosscurrents buffeting the global economy, we are
reluctant to take big-macro directional bets, but on balance are more disposed to
back the Fed. In our global macro strategy, this makes us negative on the outcome
for core rates and we are short US duration in the 10-year part of the curve. We
are also cautious about risk in general and running credit and FX exposure close
to neutral. At the current juncture, picking winners and losers at an idiosyncratic,
bottom-up level makes more sense.

   Author
   Russel Matthews
   BlueBay Institutional Senior Portfolio Manager, RBC Global Asset Management

   Russel is the lead portfolio manager for BlueBay’s global macro strategy. He joined BlueBay in September 2010
   as a Portfolio Manager responsible for the firm’s European government and aggregate bond portfolios. Prior to
   BlueBay, Russel worked at Invesco Asset Management from 2000 to 2010, where he was responsible for managing
   multi-currency global fixed income portfolios for retail and institutional clients. He was also Co-Head of Global
   Alpha (ex US). Prior to joining Invesco, Russel worked at Citigroup Asset Management. Russel was born and raised
   in Zimbabwe, he attended University in South Africa where he earned a Post Graduate Diploma in Management
   from the University of Cape Town in 1996 and a Bachelor of Arts degree in Economics and Journalism from Rhodes
   University in 1995.

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Published January 2023