Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the risks and opportunities we’re likely to face in 2023 with Brian Giuliano, senior vice president and client portfolio manager with Brandywine Global Investment Management. We talked about interest rates and economic growth, and we started by asking where we stand with regard to inflation.

Brian Giuliano (BG): I think it’s important to distinguish between secular or structural inflationary pressures versus cyclical ones. And there are a number of reasons to believe that we may actually be in the early innings of a secular rise of inflation. You think about the end of cheap energy, considering what is going on in Europe with Russia. Or with just the chronic under-investment for almost a decade-plus in the energy space. Also, the end of cheap labour, the structural inefficiencies in the labour market. It could keep wages supported or underpinned. In other words, this decade is likely to be more inflationary than the last decade. But the here-and-now story — the cyclical story — is that, in our estimate, inflation may actually fall harder than people expect in 2023. So, on balance, we’re thinking inflation is likely to be significantly lower by mid-late summer, let’s say, especially if central banks continue down this path of aggressive rate hikes and removing more liquidity from the global economy.

Interest rates and China

BG: Similar trends and themes are in play in the U.S., in Canada, in Europe, and actually many other markets around the world. The one economy we think is particularly interesting right now is China. They are moving in the opposite direction of most of the rest of the world. They’ve been easing monetary conditions, over the past year. Interest rates in China have actually fallen since the start of 2021. And the Chinese are finally reopening their economy post-Covid. The odds are that China reflation does not inflect higher until probably the second quarter of this year. But this year, U.S. and China are heading down opposite paths.

Can the U.S. keep a recession at bay?

BG: The list of challenges facing the U.S. and global economy is long and continues to grow. But it’s not all bad news. There is good news out there. There is still excess savings within the economy. And labour remains actually remarkably strong. So, for 2023, somewhere between a soft and hard landing scenario seems reasonable to us.

Global growth prospects

BG: This may be a tale of two halves. U.S. growth is likely to continue slowing in the first half of this year. But in the second half-year, we could actually see some stabilization, especially if the external environment can improve. If the Chinese economy is reopening right now, it’s going to take some time for growth to accelerate, but if that can happen in the second half of this year, if the Fed can also pause, maybe even pivot by mid-year, you would think that that would help to stabilize growth. Our outlook for the global economy this year is that we’re likely to see something between a soft and hard landing scenario, but passengers need to buckle up because it’s likely to get bumpy. Growth is probably going to continue to be very lackluster. Inflation is falling. In this kind of an environment, interest rates are likely to decline in 2023, as opposed to what we saw took place in 2022.

What fixed income sectors he likes

BG: We like lower-quality investment-grade names — so triple Bs — as well as higher-quality high-yield names. We don’t want to go too low in credit quality because of all the risk factors. And we don’t want to go too high in quality because there just isn’t as much value there. So, right in the middle of the quality spectrum, we think offers some pretty attractive risk-adjusted returns. Also, emerging market debt and good old-fashioned high-quality government bonds we think offer some pretty good value.

And finally, where are the opportunities for savvy investors?

BG: If you underweighted fixed income the past couple of years, congratulations. That was the right call. You likely protected the downside, protected principle, in what was the most challenging bond market in modern history. But a lot has changed in a very short period of time. Fixed income has income again. Now is the time to rethink your bond exposure. Take advantage of the reset that has just taking place across global bond markets.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Brian Giuliano of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for a.m. newsletter and never miss another Soundbite. Thanks for listening.


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