Fidelity International, said a hard landing remains the most likely outcome in 2023 for Europe and the US, with Australia likely to avoid a recession despite consumer confidence taking a hit.
Fidelity's new local managing director Lawrence Hanson says the current market is one of the toughest in recent history and unlike anything he has ever seen.
While some investment houses believe the US Federal Reserve can live with some inflation, Fidelity is not one of them convinced that the central bank is committed to knocking inflation on the head.
"Markets want to believe that central banks will negotiate the economy towards a soft landing. But a hard landing remains our base case. Rates will likely remain in the restrictive zone until inflation comes under control," he warns.
However, he thinks the Australian economy should be more resilient due to the cushioning impact of commodities and an increase in net migration.
While Australia will likely avoid a recession, he argues that there will be pressure on consumer spending and a negative wealth effect through house prices and cost of living increases.
2022 was very grim, "In fact, it was spectacular, given everything the world went through in a short time," he adds.
Hanson says the market will continue to face a confluence of formidable challenges like soaring inflation, the fallout from the invasion of Ukraine that disrupted energy markets and a fall in consumer confidence.
The big difference between 2022 and 2023 is that we understand the threats and dilemmas ahead -there are no "unknowns".
Hanson predicts that markets will continue to be choppy during the first half of the year, with some normalisation in the second half.
The new managing director - appointed last October - believes that although markets have priced in a lot of the current challenges, volatility is likely to remain throughout the year.
"This isn't all bad news for investors; volatility throws up opportunities."
Opportunities and pitfalls
Hanson fervently believes that solid opportunities will emerge later in the year.
Hanson cites the well known investment adage that the stock market is a market of stocks. "You don't buy the market as a whole."
Every economic recession is different, and so is the impact of an economic slowdown on corporate earnings.
That means searching for stocks where earnings rise into cyclical weakness and those with enough pricing power to cope with sales and margin pressures.
Two broad investment themes stand out - Asia and re-shoring as corporates restructure supply chains to mitigate Covid-19 disruptions.
"Countries such as Thailand, Vietnam, Mexico and Canada will benefit from re-shoring. On top of that, some fast-growing economies, like India and Indonesia will benefit from the middle-class wealth effect," he explains.
Hanson concedes that they are not the biggest and deepest markets from a liquidity perspective. But he says there are some bright spots - especially the re-shoring story.
He should know.
Before arriving in Australia, Hanson ran Fidelity's Singapore office and southeast Asia operations. He also oversaw the firm's Middle East and African businesses.
China's re-opening and recovery will also be a positive driver of global growth. "However, Hanson anticipates the recovery will not occur in a straight line, with growth acceleration more pronounced in the second half of 2023 and into 2024.
Emerging investment trends
The global investment giants have warned investors about the dangers of looking backwards rather than embracing new market phenomena.
BlackRock writes that we need a new playbook - that more volatility means funds must change portfolios more frequently.
Vanguard says stormy weather experienced by financial markets this year has likely unmoored even the most seasoned of investors.
Fidelity believes the way ahead is to focus on a more selective and robust approach to capital allocation.
"We tend to say that every year, but I think this will be even more critical for 2023," says Hanson.
"Looking at the market from a multi-asset perspective, a more defensive portfolio position is probably prudent. "So we are examining how you use cash within the multi-asset portfolio and how you think about uncorrelated asset classes in light of potential volatility.
"In 2023 and beyond, we believe that for multi-asset investors, it will be important to use the possible broadest toolkit, including private assets and absolute return strategies."
The big investment trends like sustainable investing, alternatives, and active management will continue, although some new ones are starting to emerge.
For a start, Hanson argues that the view of risk has changed over the past decade. "The views of risk have moved from a focus on volatility and factor risk to thinking about risk holistically, including environmental and societal impacts."
His view jibes with the World Economic Forum's latest risk report. The WEF notes the return of "older" risks like the widespread social unrest, geopolitical confrontation and the spectre of nuclear warfare.
The overwhelming rise in allocations to private markets characterised 2022.
Interestingly, Hanson is now seeing nascent demand in public-private crossover strategies and expects this to evolve.
Rather than allocating capital to strategies that invest in either public or private market assets, investors invest in strategies that allocate to both.
Increasingly, he explains, the trend is to think about private markets holistically and construct portfolios with a mix of public and private assets to deliver a particular outcome.
"For instance, public and private debt have the same underlying economic exposures, you don't necessarily need to think about streams separately," he notes.
"The public capital market is a small part of the holistic capital market. So when you're thinking about portfolio construction, why limit yourself to just public or private?"
The head of Fidelity's Australian business believes the big institutional investors will continue to segment public and private debt and have the skills to blend these assets as required.
But he reckons wealth managers will likely need help to create hybrid solutions.
A shift from internalisation to partnerships and competition to collaboration is also on the cards.
Hanson says collaboration is becoming increasingly common among peers but also asset owners.
Most are keen to avoid massive governance structures overseeing hundreds of managers.
"We observe that big asset owners want fewer, deeper relationships with partners and are willing to collaborate - particularly on those themes that address the greater good."
"We're seeing it with wholesale partners in Europe and big asset owners in Asia and the Middle East."
Part of Hanson's job is to launch new products into the local market where they make sense.
Bringing some new strategies to market will be a focus, over the next 12 to 24 months.
"However every market has its nuances and demands and needs," he concludes.
"One of the advantages of being a big global firm is that we have a lot of products and strategies that we can launch locally. But this needs to be done carefully.
"I think one of the mistakes you can make when trying to build a business within a market is to expect that something which has worked in one market will automatically work elsewhere."
A big opportunity for Fidelity is in the global equites space. "Fidelity has fantastic global coverage and investment expertise and we're excited to continue to build on our highly successful Australian equities franchise and bring more global offerings to the domestic market."