Quarterly review, Q4 2022: has the extraordinary become routine?

Pandemic, war – what next?

Twelve months ago, in my Q4 2021 review, I looked back on “a second extraordinary year”. It is time to reflect on a third. Maybe I was right when I suggested that marked uncertainty should be seen as a new normal.

The opening of last year’s article now appears cruelly ironic. It referenced Helmuth von Moltke the Elder, the 19th-century Prussian field marshal credited with the idea that no strategy survives first contact with the enemy.

Just weeks later, of course, war returned to European soil. Russia’s invasion of Ukraine set the scene for a tumultuous 2022, combining with the lingering impacts of the COVID-19 pandemic to produce another perfect storm.

Von Moltke’s theory was quickly proved on the battlefield. Russia’s hopes of a swift victory in Ukraine were dashed, heralding a drawn-out conflict with an ever-shifting narrative and far-reaching effects.

As a result, his axiom has also rung true in investment circles. Confronted by macro issues including rampant inflation, rising interest rates, an energy crisis and mounting food insecurity, many investors have been compelled to reappraise their worldview.

Naturally, what everyone would like to know now is whether 2023 will be better. The fundamental message that runs through Invesco’s Q4 2022 thought-leadership outputs is that the situation will improve – or at least should – but that strategies will again need to be flexible in the face of change.

Light at the end of the tunnel?

Since it has been punctuated by largely unforeseen and even unprecedented shocks, the recent past might indicate that investors have little reason to expect an easier ride in the near future. Thankfully, the greater sweep of history implies otherwise.

Although their causes have long been debated, economic cycles are a widely accepted phenomenon. Economies fluctuate between periods of growth and recession, essentially moving through four phases: expansion, peak, contraction and trough.

Of late, as our 2023 Investment Outlook explains, we have been mired in the contraction stage. Growth has been below trend and decelerating. Unfortunately, this means that the worst may still be to come.

Yet it also means that we could see the beginnings of a new cycle soon. Barring further unpleasant surprises, the light at the end of the tunnel should start getting brighter during the next few months.

The course of inflation and monetary policy will obviously determine how quickly and intensely it shines. We must accept that it might amount to a flicker rather than a blinding blaze. But even a glimmer would be both welcome and telling.

Crucially, the patience of long-term investors should be rewarded once recovery is under way in earnest and growth rises again. It is then that risk assets are likely to deliver outperformance.

Building for a challenging future

If 2023 is likely to bring a move toward recovery, as we contend, then attention must inevitably turn to which assets might be regarded as attractive now and over the relatively short term. Our Global Asset Allocation 2023 Outlook attempts to address this consideration.

Paul Jackson, our Global Head of Asset Allocation Research, and András Vig, our Multi-Asset Strategist, make the case for reducing defensiveness but keeping some powder dry for when recovery is confirmed. They base their argument on an assumption that headline inflation will decline rapidly. 

They propose being overweight in real estate, gold and high-yield and investment-grade bonds. They conclude that equities offer decent potential but not on a risk-adjusted basis. In addition, from a regional perspective, they prefer emerging markets and the US.

Importantly, Jackson and Vig also concede that geopolitical risks are “likely to persist”. They note that these may stem not just from the unfolding catastrophe in Ukraine but from US-China tensions, especially in relation to the prospect of a Chinese invasion of Taiwan.

Arnab Das, our Global Market Strategist in EMEA, further explores the continued fragmentation of both geopolitics and geo-economics in Brave New World Order and Dollar Reserves. He focuses in particular on the West’s decision to freeze half of the Central Bank of Russia’s foreign exchange reserves.

Das asks whether this move constitutes “another nail in the coffin of globalization” and more evidence of economic and financial decoupling. He also asks whether the dollar can endure as the world’s dominant reserve currency and whether parallel systems might enter the reckoning, as they did for much of the Cold War.

Opportunities and resilience

The bigger picture, then, is still complex. Economic recovery might come within months, but the broader backdrop is likely to remain both challenging and in flux. Perhaps the extraordinary really has become routine.

Investors are occasionally criticized for remarking that opportunities can be found amid almost any circumstances. The sentiment may seem harsh in troubled times, but it is a truth that holds. The renewed relevance of security and defense offers a classic illustration.

For obvious reasons, the need to ensure protection against hostile actions is climbing up the agendas of nations, businesses, organizations and individuals. In tandem, as I discuss in Why Investors Need to Think Again About Security and Defense, this sphere can now be seen as an integral component of the most influential investment theme of all: technology.

And what about the technology sector as a whole? I really do not agree with those who claim that the battering suffered by tech stocks during much of the past year has reduced this arena to ruins and could even herald an episode similar to the dot-com bust of the late 1990s and early 2000s.

As I observe in Why Tech Could Still Represent the Ultimate Long-Term Play, the reality is that technology still underpins almost every aspect of our day-to-day lives. It is at the heart of every meaningful advance and every genuine hope of somehow building a better, safer, more sustainable, more resilient world. It is tech, above all else, that consistently enables humanity to cope with the extraordinary.

This underlines one of my strongest convictions, which is that it is in some ways woefully insufficient to wonder where we might be in another 12 months. Such an approach is unquestionably useful but inherently limited. As long-term investors, we should always endeavor to look much further ahead – irrespective of how unusually daunting, doubt-filled and “noisy’ the immediate future might be.

Disclaimer: The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment-making decision. As with all investments, there are associated inherent risks.

Selected thought-leadership outputs for Q4 2022

2023 Investment Outlook

Adam Burton, Senior Economist

David Chao, Global Market Strategist, APAC ex Japan

Arnab Das, Global Market Strategist, EMEA

Alessio de Longis, Senior Portfolio Manager and Head of GTAA Solutions

Kristina Hooper, Chief Global Market Strategist

Paul Jackson, Global Head of Asset Allocation Research

Turgut Kinsbey, Director, Fixed Income Research

Tomo Kinoshita, Global Market Strategist, Japan

Brian Levitt, Global Market Strategist, North America

Ashley Oerth, Investment Strategist

Drew Thornton, Head of Thought Leadership, Solutions

Rob Waldner, Chief Investment Strategist, Invesco Fixed Income

Published December 2022

The Big Picture: Global Asset Allocation 2023 Outlook

Paul Jackson, Global Head of Asset Allocation Research

András Vig, Multi-Asset Strategist

Published December 2022

Brave New World Order and Dollar Reserves

Arnab Das, Global Market Strategist, EMEA

Published November 2022

Why Investors Need to Think Again About Security and Defense

Henning Stein, Global Head of Thought Leadership and Market Strategy

Published December 2022

Why Tech Could Still Represent the Ultimate Long-Term Play

Henning Stein, Global Head of Thought Leadership and Market Strategy

Published December 2022