Insights and Strategies
A Slingshot Market to Start 2023
And just like that, global equities are off to a strong start this year, rallying higher, similar to slingshot bands pulled to their max and then released. Many investors are likely puzzled by the strong rally in risk assets – i.e., equities - to start 2023, especially given the rising probability of recession risks across several economies globally, including Canada, the U.S. and the U.K. in 2023. However, we think this rally makes sense, especially as China reopened for business and abandoned its economically destructive zero-COVID-19 policies on October 31, 2022. This has been, by far, the single biggest catalyst driving risk assets higher, resulting in a material outperformance of global equities (excl. North America) vs. the S&P/TSX Composite and the S&P 500 Index.
While no one could have predicted such a massive pivot after three long years of COVID-19 lockdowns across China, those of you who followed our guidance to remain globally diversified from our December Insights & Strategies report – 2023 Outlook – It’s Complicated… – “We are now seeing a more compelling risk/reward profile for both stocks and bonds globally than we did at the start of the year” and “for 2023, we suggest investors maintain a diversified allocation to global equities and remain highly selective” – have been rewarded in only a few short months.
As an extension of these recommendations, we delved further and discussed our constructive view on global equities (excl. North America) in our recent asset allocation report, Quarterly Outlook: The Seventh Inning Stretch. In this report, the Raymond James Ltd. Asset Allocation Committee suggested investors maintain a neutral stance to equities as a whole, but given their softer outlook for the U.S. dollar index, they expected value stocks globally to outperform growth over the near-term, with developed markets (e.g., MSCI EAFE) and emerging markets (e.g., MSCI EM) likely putting up a good showing in 2023, especially as China abandoned its zero-COVID-19 posture. Moreover, the committee noted that attractive relative valuations and a low bar for earnings across several markets globally made for a rather compelling case for equities outside of North America. While these views have largely panned out as the committee anticipated, it has been more material and has occurred a lot quicker than expected.
