Outlook 2023: Keep calm and carry on

2023 has been a volatile year for equity markets. However, opportunities are on offer to discerning investors who are willing to keep calm and carry on. 

Rachel Titchen, charities and investment director at leading independent consultancy Broadstone, said despite market volatility, equities offer the potential for robust returns over extended periods. 

She said: “Equities have long been a staple in pension portfolios. Despite market volatility, they offer the potential for robust returns over extended periods, thus providing an effective hedge against inflation. 

“Broadstone emphasises that a passive market cap equities approach can yield significant results for UK defined benefit (DB) pension schemes with longer investment time frames. This approach allows them to ride out performance troughs, an essential factor given the recent market fluctuations.”

A similar sentiment was echoed by PensionBee’s Becky O’Connor. “US equities make up around 60% of a typical default pension fund portfolio, so how they are performing is key.

“Equity markets have stabilised in the latter half of this year, following a difficult period throughout 2022 and into 2023. This stabilisation has evolved from markets believing that interest rate rises may have reached a peak, now that inflation has begun to fall. 

“Barring geopolitical and recession risk, the outlook for global equities appears brighter for the coming year than it did 12 months ago, even with ‘higher for longer’ interest rates. There are new, intriguing sectors capturing attention, such as Artificial Intelligence.”

Kiran Nandra, head of equities at Jupiter Asset Management, added: “The lack of direction in markets this year has made portfolio management highly complex, with multiple investment themes emerging on a weekly or daily basis and, not surprisingly, many pension funds have been positioned defensively. 

 “A strong labour market and stickier-than-expected inflation suggests that rates may stay higher for longer, and the global economic growth outlook is at best uncertain. Yet we’re surely getting closer to the end of the extraordinary rate hiking cycle, and even sluggish growth can provide support to equity markets in 2024. 

 “The macro environment is now much different from the benign setting seen in the years after the Global Financial Crisis that enabled both stocks and bonds to rally. The coming year could see more volatility and return dispersion, which is advantageous for active fund managers offering opportunities to exploit market inefficiencies to generate alpha.”

Further optimism was expressed by Adam Gillespie, member of the Society of Pension Profession’s (SPP) Investment Committee.

He said: “With interest rates in developed markets looking like they are peaking and inflation starting to fall, there are some grounds for optimism.  However there remain signs that inflation may persist at a higher level, and so rates may remain higher than expectations. Falls in leading indicators such as the PMI also temper enthusiasm for the outlook, despite many markets falling back from highs in July, making valuations more attractive.”

He added the sector will be shaped by the outcome of major elections next year. 

Gillespie said: “Elections look to dominate 2024 - there are planned to be more than 70 covering more than 50% of the global population. This includes the US and the potential second term for Donald Trump, potentially influencing everything from climate policy to ongoing military support in Ukraine and further trade wars.

“Within emerging markets, fundamentals and sentiment for this region, in particular China, continue to weigh despite valuations continuing to look attractive.”

Jupiter’s Kiran Nandra said selective opportunities will arise for investors amid political uncertainty: “General elections will be held in 2024 in the US, UK, Mexico, Taiwan, among others, and may bring political change and episodes of market volatility. Geopolitical tensions are an ongoing risk and mean ‘onshoring’ will continue as a theme as companies move supply chains to countries that are considered allies. Emerging market economies such as Mexico, the ASEAN region and India are beneficiaries.”

More broadly, Nandra sees opportunities in Europe’s equity markets. “Europe is cheap on a historical basis and is home to global companies that are exposed to important secular growth opportunities such as demand for computing power and semiconductors, the clean energy transition, biotechnology and consumer affluence and luxury products.”

A shift in strategy

The Mansion House reforms by Chancellor Jeremy Hunt could affect pension schemes’ allocation to equities. This is because the plans encourage diversifying investment strategies for pension funds. 

Brian Slattery, senior vice president and head of Northern Europe at Clearwater Analytics, said this could lead to a shift in strategy. 

He explained: “Jeremy Hunt’s Mansion House reforms for pension funds represent a considerable shift in strategy for many. Most pension fund investment portfolios have historically been made up of straightforward and relatively low-risk assets like long-dated government bonds, high-grade corporate bonds, and some listed equities – the foray into the private market space will be interesting to monitor from an operational perspective, as these types of assets are very different.” 

This was reiterated by Joseph Cordahi who questioned how these pension reforms will impact the industry as they encourage pension funds to diversify investment strategies. 

He added this is of significance because pension funds typically invest in ‘safer assets’ such as public equities and sovereign bonds.

The product strategy director at NeoXam said: “Chancellor Jeremy Hunt is not the first British politician to see the phrase ‘pension pot’ as missing the letters ‘ential’ on its tail. He is attempting to incentivise pension funds to diversify their investment strategies, and pour more funding into private markets – to back UK businesses that are not publicly listed. 

“One of the largest hurdles that pensions are now facing is the execution of the operational evolution that is required when allocating towards a more diverse set of assets. After all, the reality is the operational processes surrounding private assets differ considerably from those associated with the ‘safer’ assets pension funds typically invest in, like public equities and sovereign bonds.”