Canada Life Investment Management 2023 market outlook
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It’s been a difficult year for markets, with both fixed income and equity markets suffering in tandem. Now, many experts – even the federal finance minister – are saying to brace for a recession in 2023. It’s enough to make an investor retreat to a bunker or – the financial equivalent – a cash bank account.

A better choice would be for an investor to check in with their financial advisor and not make any rash decisions, says Susan Spence, vice-president and portfolio manager with Portfolio Solutions Group, a division of Canada Life Investment Management. In some ways, the market and economic environments in 2023 look more promising than they did a year ago, she notes, adding that investors should peruse Canada Life Investment Management’s 2023 Market Outlook report to find out what’s in store in the coming year.

For example, at the end of 2021, yields on fixed income were roughly half what they’re at today. That means you can expect double the income on the same, lower-risk securities as you could a year ago, greatly increasing the likelihood of positive returns. “You’re starting out the year at a better point in terms of what you can get out of fixed income,” Spence explains. “That should give investors comfort that they are likely to get more predictable returns out of fixed income in 2023.”

Equities, meanwhile, have come down from their lofty late-2021 valuations. While there may be further losses, the cheaper valuations mean declines will likely be less severe and they offer investors a “margin of safety,” she says, as they strive for more positive returns in 2023. As you plan for the year ahead, Spence recommends five ways to think about investing in 2023.

Think long term

“You need to be forward-looking and not just look at the most recent history to drive your investment decisions,” she explains. In 2022, for example, the performance of stocks and bonds was highly correlated. But that is a rare occurrence historically and it’s unlikely that the pattern will persist. Over the long term, you can expect fixed income to have a low or negative correlation with equities most of the time. At the same time, markets tend to trend higher over the long term, and there’s no reason to think that won’t continue to happen.

Diversify your holdings

“We certainly did not see what you would expect from the benefits of diversification in 2022, at least with fixed income and equities,” she allows. Still, there were other asset classes, notably real estate, that managed to achieve positive returns. Having a professionally managed solution – funds where fund managers choose the investments, often in keeping with targeted risk profiles – she adds, is a great way to get diversification because it enforces discipline around asset allocation, while providing asset managers the ability to be tactical and take advantage of shorter-term opportunities.

Continue contributing to your savings regularly

“Market timing is a tricky thing,” Spence notes. It’s well documented that it’s impossible to know when markets hit their bottom, which means if you sell out of your portfolio to try and get back in a more opportune time, you’ll probably miss out on a good portion of the upswing, only getting back in when it’s too late. A more reliable strategy is to stick to a contribution schedule that harnesses the power of dollar-cost averaging, which involves buying the same dollar amount of securities every month. When prices are depressed, you’ll end up buying more units, which will then hopefully increase in price as markets recover.

Consider target date funds

Investors with a specific time horizon in mind may also want to look at target date funds, which are diversified all-in-one solutions that hold a variety of assets and change in allocation the closer you get to your end date. Essentially, it’s a specialized form of disciplined investing, says Spence. Just choose a retirement date, such as 2040 or 2045 – or another specific target date; as part of the ongoing management of the fund, the portfolio managers will then adjust the allocation to become more conservative as you get closer to retirement. In an environment like we’re in today, target date funds can help take the emotion out of your investing decisions and keep you invested for the future, says Spence. 

Expect the volatility to continue

In 2022, markets were dominated by macroeconomic forces: COVID-19’s continued spread and the response to it, Russia’s invasion of Ukraine, the acceleration of inflation and higher interest rates.  Heightened uncertainty around slowing global growth, geopolitics and central banks’ actions are expected to result in continued volatility in 2023, especially early in the year. How high interest rates will go and for how long their upswing will last remain unknown.  It’s also still unclear how an economic downturn might affect corporate profitability. But, barring any big surprises, markets will likely be driven more by company fundamentals this year and less vulnerable to swings in market sentiment, says Spence.

The good news for investors, she adds, is that markets are forward-looking. They try to anticipate what will happen in the real economy months in advance. They will be quick to seize on any evidence of a change in inflation, a shift in monetary policy or the expectation of a resumption of economic growth after an anticipated slowdown. Think long term and the returns will come.

To hear more of Spence’s perspective and get answers to your top questions about the markets, register for Canada Life Investment Management’s 2023 market outlook call on Jan. 12 at 1 p.m. ET.

Capitalize on Canada Life Investment Management’s Market Outlook report, which will be released Jan. 5, 2023 on canadalifeinvest.ca. With market insights from some of the most sought-after investment managers in the industry, it’s designed to help you support clients through uncertain times so that they can plan for life as they know it.

Disclaimers

For advisor use only. The views expressed in this commentary are those of this investment manager as at the date of publication and are subject to change without notice. This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any product or fund referred to.

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