Looking into the back half of 2023, the accumulated weight of inflation, higher interest rates, and tightening financial conditions is slowing the economy perceptibly, and we expect a recession later this year and into 2024.

The end of economic cycles can present many challenges, but the biggest test may well be recognizing that now may be the time to preserve wealth, and to set the stage to grow capital as conditions eventually improve.

Our 2023 Midyear Outlook looks to help investors navigate this end-of-cycle turbulence. To be more specific, our guidance since early 2022 has been to position defensively, and our midyear outlook reiterates that advice. We believe there will come a time to turn more opportunistic in positioning portfolios for a recovery; however, we need to respect the signals for the balance of 2023, even as we are
looking further ahead to when the risk and reward dynamic might turn more favorable.

So, more specifically…

In equities we expect corporate earnings growth to contract in the second half of the year, and for tightening credit and economic contraction to hurt small- and mid-sized corporate earnings by comparatively more than large-cap equities. We have taken the opportunity to rebalance between the U.S.
and other developed markets, and we favor setting aside some capital in short-term fixed income to fund an eventual reallocation back into equities as a later economic recovery takes hold.

In fixed income, an economic recession should create headwinds for credit-oriented sectors. So, credit
quality remains paramount in our view. We prefer U.S. government securities, investment-grade Investment and municipals, and favor careful due diligence in selecting investment-grade corporate bonds. In terms of maturities, we prefer a barbell strategy that favors short- and long-term securities.

In real assets, 2023 looks to be a short-term price pause in the commodity super-cycle, that is to say, an extended period of price gains. We would use this pause to position in a broad commodity basket for what we believe should be a strong 2024. Real estate investments broadly should struggle under recession and difficult borrowing conditions, but we see some opportunities in select sectors of public and private real

Finally, in alternatives, rising interest rates, high debt levels, wage pressures, and slowing economic growth present potential opportunities in hedge fund strategies that historically do not correlate with traditional equity and fixed income markets. What’s more, we believe hedge fund and private Distressed Credit strategies can capitalize on recession-driven credit market stress.

For specific asset class recommendations and our top five portfolio ideas, read our special report: 2023
Midyear Outlook: Navigating end-of-cycle turbulence.
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