Multi-sector asset allocation outlook Q1 2023

Macro factor summary
Inflation is peaking and should decline steadily in the US and Europe in 2023. Growth remains slow in response to tightening policy, but easing energy prices and the reopening in China after the end of its Zero-COVID policy are supportive of growth and have mitigated the risks of recession in 2023. Central banks are likely to respond to easing inflation and slower growth by ending the current rate hike cycle. We expect the US federal funds rate to peak in the first quarter of this year and European rates to peak in the second quarter. As a result, we do not expect further significant tightening of financial conditions in 2023.
Asset allocation summary
Declining inflation and the end of the central bank rate hike cycle should provide a positive tailwind for fixed income assets in 2023. After rerating higher in 2022, real yields and high quality credit spreads offer value for investors, in our view. We favor allocations to high quality credits, which offer attractive yields on a historical basis, and should be supported by expectations of declining inflation and the end of the US and European rate hike cycle. The US dollar shows signs of having peaked, and should be expected to decline over the balance of the year as the US Federal Reserve (Fed) stops hiking rates and recession fears ease.
Risk position summary
We have a slightly overweight risk positioning. The end of the central bank tightening cycle and better than feared news on economic growth point to a soft landing for the global economy and should provide a tailwind for risky assets. Continued political and economic uncertainties argue for staying slightly cautious.