How To Adapt To Changing Investing Conditions

In terms of equity markets as well as fixed income markets, 2022 was a tough year for both. An unrelenting war in Ukraine, underpinned by historically high inflation, solid consumer demand, rises in interest rates, and a heightened level of uncertainty for investors, marked this year as one of the most turbulent in recent memory. However, as we move closer to the end of 2022, there are a number of burning questions that every investor has on their minds: how will this year's market compare to last year's? Markets are expected to be driven by what factors in 2023? Are there any strategies investors should adopt in order to be prepared for the road ahead?

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The market landscape has now changed quite a bit in the last few months, despite some of the key variables that impacted markets last year. A slowdown in consumer demand and an expected easing of inflationary pressures are signs that the Federal Reserve (Fed) may take a more incremental and data-driven approach to its tightening cycle as a result of easing inflationary pressures.

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Currently, the Federal Reserve is expected to raise its policy rate to 5.25% in its next meeting. However, that is subject to change based on incoming data on inflation and employment levels. The Federal Reserve has raised interest rates at a pace that has not been seen by the country in 40 years, which is in stark contrast to the pace of rate hikes it made last year.

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Despite the fact that this change in policy is notable, the rationale behind it is that the impact of past hikes in interest rates takes time to spread throughout the economy. A pause allows the Federal Reserve to conduct a proper assessment of the impact of its past policy actions on the incoming economic data so that it can determine if its actions have achieved the intended results. Until now, we have seen unprecedented rates of rate hikes, which have made a significant impact on inflation due to the lack of demand for goods and services in the economy. There is a good chance that if inflation falls closer to the Fed's target level in the future, the Fed will be able to lower interest rates in order to support growth more effectively.

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All the tightening measures taken so far are likely to lead to a softening of consumer spending as a result of the cumulative effect of all that has been done. Our expectations are that the slowdown in the demand for certain products is going to continue, and we are already seeing an impact through the slowdown in the demand for certain goods. The slowdown in demand is likely to have knock-on effects on corporate earnings growth this year, and therefore we believe it is more important than ever for investors to focus on companies that are resilient to these challenges.

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With a slowing economy and relatively high-interest rates, which are expected to peak in the first half of the year, how should investors plan for the future in such an environment?

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Investors are increasingly turning to the fixed-income segment of the market to take advantage of the opportunities that it offers. There has been an increase in interest income for fixed-income investors due to higher yield levels. It may be a good idea for investors to consider taking advantage of elevated yields by investing in high-quality fixed-income securities, which may include treasuries, investment-grade bonds, and municipal bonds, to benefit from the elevated yields. There is a possibility that future rate cuts from the Fed could further benefit fixed-income investors by resulting in capital gains as bond yields have an inverse relationship with bond prices.

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The equity market may offer some opportunities outside of the United States for investors interested in equities. This can be attributed to a number of factors. Compared to what we are currently seeing domestically, valuations for non-U.S. companies have been more affordable than what we are seeing domestically at the moment. Furthermore, there is also an indication that things are looking brighter in other parts of the world than they did last year. As an example, in Europe, there have been a lot more resilient people than expected when it comes to weathering the financial crisis. After Russia, the main natural gas supplier to Europe, reduced its LNG supplies to the region last year, there were some significant concerns regarding Europe's ability to source natural gas supplies in the future. However, they have nonetheless managed to get enough natural gas supplies from other parts of the world, at least enough to get them through this winter, which had been a primary concern for them. A strict zero-COVID policy in China had a significant impact on the demand for these products. The Chinese government has since loosened its policies, which has helped to alleviate growth concerns and has been a boost for Chinese stocks in recent years. As an added advantage for international investments, a weakening dollar is also another factor at play this year. It appears that the U.S. dollar is fundamentally overvalued, and if it continues to fall, this will provide a tailwind for international equities as foreign currencies may strengthen against the weakening dollar, thereby benefitting international equities.

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Generally, resilience and the focus on fundamentals within companies will be critical for investors this year, and therefore we believe that investors may benefit from a tilt toward more value-oriented and dividend-growth strategies this year.

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As the year progresses, it is important to keep these factors in mind, but the fundamentals remain the same. Instead of focusing too closely on the direction of the market or the exact timing of policy changes, it is much more prudent to focus on your goals, to remain invested, and to be well diversified.