The selldown of risk assets in 2022 marked a watershed moment for financial markets. Never have equities and bonds corrected so acutely in tandem. Not during the 1970s recession, and certainly not during the Great Financial Crisis (GFC) of 2008. Hou Wey Fook, Chief Investment Officer, DBS Bank and Dylan Cheang, Strategist, DBS Bank in 1Q23 CIO Insights report talk about the opportunities, hazards, and how investors should position themselves for the year on the US stock market.

While it is easy to attribute this volatility to the Russia-Ukraine crisis and China’s Covid-19 lockdowns, clearly, the biggest culprit is the US Federal Reserve. After being caught wrong-footed in its “transitory inflation” narrative for an unnecessarily prolonged period, the Fed has frantically tried to salvage its credibility through aggressive rate hikes which, inevitably, exported monetary pain to the rest of the world (in particular, EMs and high growth equities).

And while the central bank has since expressed a willingness to downshift to a slower pace of policy tightening, much will also depend on whether the recent softness in CPI data is sustained.

In 2023, we expect two things to transpire over the course of the year. One, the Fed is set to downshift its monetary policy as economic momentum decelerates, and two, the dollar to peak.

Also Read: US CPI data December release to get investors’ attention this week

Given the crosscurrents of peaking bond yields and a slowing economy, the trajectory for equity markets will be more complicated and nuanced. The pointers below aptly summarise the opportunities, risks, and how investors should position for the year:

• Opportunities: After the acute selldown of 2022, what opportunities can investors seize in the new year? It is an opportune time to pursue the 60/40 portfolio strategy.

• Risks: Will corporate earnings (and by extension, equity prices) take a significant hit should a recession transpire? Earnings decline to be partly offset by valuation expansion.

• Positioning: Inflation has remained sticky despite falling commodity prices and easing supply chain pressure. Recession risk, however, is on the rise. How should investors navigate this High Inflation/ Low Growth paradigm? Overweight bonds over equities.

As the saying goes: “Never waste a crisis”. For investors who bemoaned the lack of “value opportunities” in risk assets previously, the time has come. As painful as 2022’s selldown has been, it has also surfaced fresh opportunities for investors to construct a traditional “60/40 portfolio” (a portfolio consisting of 60% equities and 40% bonds) with a great starting point.

Also Read: A 60/40 portfolio for 2023 after both equities and bonds slumped last year