Global asset manager Northern Trust expects the market to face fundamental headwinds for at least the next three months amidst a growth slowdown in a recession-hit environment but remains optimistic about recovery from Q2 onwards. The group shared its investment outlook for 2023 in a breakfast briefing session at the Gherkin, London, on January 12.
The discussion began with Marie Dzanis, head of Northern Trust Asset Management, EMEA, highlighting 2022 trends going strong in the new year. “Sustainable investment is reaching the next level is a key theme. Despite regional differences in outlook, issues like biodiversity, human capital and decarbonisation are emerging as important for strategic structure. The need of the hour is to look at portfolios through the lens of risk and deploy mitigation strategies for the best outcomes,” said Dzanis. “Volatility continues, as reflected in investors’ concern about uncertainty with geopolitics, the Russia-Ukraine war, behaviour of central banks, China’s reopening and the likes in their portfolio. “
Industry voice matters, she emphasised, citing the example of Northern Trust Asset Management engaging in an integrating dialogue with stakeholders to help navigate regulatory changes that impact their portfolio.
Referring to Northern Trust Asset Management’s listed private equity ETF launched last year; the asset managers underscored the importance of initiating positive dialogue with investors to facilitate better financial decisions. Dzanis laid stress on the need for democratisation, particularly in private markets. There is a growing need for conversations beyond due diligence conversation, she observed. “While the conversation on performance and structure is important, topics such as case studies, navigating market changes and regulatory impact are also becoming salient,” Dzanis elaborated, hopeful of opportunities along the way despite the uncertainties.
Uncertainty surrounding the China-Taiwan conflict continues to raise concern, and so does the resurgence of covid in China. Wouter Sturkenboom, chief investment strategist for EMEA APAC, Northern Trust Asset Management, admitted there is no avoiding last year’s uncertainties spilling over to 2023 against an unprecedented economic cycle. “The industry needs to analyse what this monetary policy means—a core point being its uncertainty factor. How long will it stay on that level?” he queried.
Perhaps starting Q2 might take some of the geopolitical tension and reopening uncertainty off, Sturkenboom opined. “Dissipation of uncertainty driving some of the headwinds —enhanced by more clarity on terminal rates of central banks, China reopening, the impact of energy crisis—is likely to facilitate repricing of assets,” he remarked, affirming that the initial signs are palpable already.
Inflation is showing signs of receding, but reaching target levels would still be unrealistic, highlighted Sturkenboom. “By the end of the year, inflation is likely to be around 3%-4% in the big regions,” he said, expecting central banks to pause at interval rates close to market figures before becoming data dependent.
Marie Dzanis championed the need for ETFs as a medium for investors to request access to solutions for security and valuation, thanks to their private equity exposure feature.
While interest rates take some easy leverages out of the equation, opportunities in alternatives are likely to grow, albeit slowly, pointed out Sturkenboom.
Investors need access to solutions in their portfolios, encouraging asset managers to develop strategies. “Intermediaries also now have access to sophisticated real-time information. Clubbed together, they support robust allocation portfolios than before,” pointed out Moret.
A key takeaway when devising a mitigation plan for risks stemming from market uncertainties is the ‘interconnectedness’ of contributing factors. As Moret pointed out, issues such as energy security, food security, energy commitments, cost of living and more are contributing to a playout as the climate becomes price-relevant by the day. “Investors want to avoid price shocks. Exposure to insurance is becoming price-relevant, and these must be factored in when calculating premium, refinancing or rethinking valuation,” remarked Moret, referring to Northern Trust Asset Management’s efforts to spot systemic risks through intelligence-integrated indices.
Northern Trust recently released its ESG risk report that attempts to isolate hidden, unintended risks in portfolios via analytics. For instance, findings indicate that the carbon footprint has been reduced in the last few years, and initiatives like the task force on climate-related financial disclosures (TCFD) are clearly beginning to show results. However, while the shift in adaptation through positive exposure to corporate governance and social issues is evident, biodiversity is yet to emerge as a pervasive theme.
Northern Trust does not envisage massive changes in bond yields throughout this year, with return forecasts for the new year close to current yields – the long end looks good, but the short end looks slightly expensive. The asset management company estimates the return on equities to hover around the 5% to 10% range – somewhat higher in Europe than in the USA, also lower for emerging markets driven by uncertainties in China. The asset managers do not see a pickup in the duration side of IG with an “okayish” credit spread and would continue to prefer high yields in IG and equities.
