Skip to main content
After a reset, 2023 offers investors a better entry point. We see a path for risk assets to recover and four reasons to be optimistic about deploying capital into public and private market opportunities throughout this year.

The market outlooks are out and most everyone is bearish, anticipating weak growth to start the year.  But amid the gloom and having seen the first two weeks of trading in 2023, in this week’s commentary we are focusing on several reasons for optimism. The bottom line is after a reset, this year offers investors a fresh and much better entry point.
 
Yes, we think a growth slowdown and a still aggressive Fed will test the markets in the first half of the year (1H ’23).  However, with inflation showing signs of easing, which should eventually prompt the Fed to stop hiking rates, we see a path for risk assets to recover in the second half of the year (2H ‘23). This means that the time to invest is now – and we would be deliberate and methodical in deploying capital into public and private market opportunities throughout 2023.  
 

Looking Through a Lens of Optimism

With the first two weeks of trading now in the books for 2023, we look ahead and see four key reasons to be optimistic and opportunistic for this year:

1. In our view, the recession or growth slowdown that everyone fears should materialize in the next several quarters and importantly, is increasingly being discounted by the market. Why? Well, to start, consensus expects little to no GDP growth this year already – a big change since September of last year. At the same time, incoming economic data has already corrected substantiality. Housing is in deep freeze, manufacturing is in contraction, earnings revisions have been ongoing, and the technology sector is seeing a slowdown too.1 Much like investors should buy stocks when price-to-earnings (P/Es) are cheap vs. expensive, investors should think about adding risk when economic data is depressed vs. exuberant. For example, based on data going back to 1962, forward 6-month returns on the S&P 500 averaged 2.3% when the ISM Manufacturing PMI gauge was above 55 and averaged 6.1% when it dipped below 50.2 Generally, a reading above 50 indicates that the economy is expanding while a reading below 50 indicates that it is generally declining.3

Exhibit 1: Growth forecasts have come down as recession fears have been priced-in by the market

2. Inflation indicators have shown signs that inflation is set to moderate. For example, in the recent ISM manufacturing survey, the reading for the prices paid component – based on the percent of respondents indicating they paid more for inputs – continued to move lower and is now almost on par with levels seen in 2020 and 2016.4 This is welcoming news as the prices paid component leads overall inflation by roughly three months.5 Goods inflation, in particular, is set to continue to decline, fueled by the recent slump in oil prices.6 At the same time, North America fertilizer prices, which tend to lead year-over-year U.S. food inflation by a couple of quarters, are now down 40% year-over-year and should translate to slowing food inflation over the coming months.7 That said, the goods component of CPI is now running at 1.9% year-over-year compared with its June 2022 peak of ~16%.8 On the other end, service inflation, while still elevated at 7.5% year-over-year, has begun to show signs of rolling over as month-over-month increases have slowed from 0.8% in mid-2022 to 0.5% as of December 2022.9

Exhibit 2: Goods inflation has moderated while services inflation remains high

The key to slowing service inflation is of course, the labor market. The BLS job opening survey and the ADP national employment report both came in higher than forecasted for the month of December.10 That said, the Fed would likely like to see more of a weakening in labor market before stopping rate hikes; however, the silver lining for markets right now is that the economy seems to be absorbing higher rates through slower activity, but not higher unemployment, preventing a deep recession. And yes, we will continue to see job cuts pile up as demand slows, but given the near record job openings (even if they come down) and lower labor force participation rate than pre-pandemic, this may result into a small rise in the unemployment rate and a rebalance across industries (for example, a correction of tech excess) and softer wages. Indeed, in the latest payrolls report there were larger than expected job gains, but average hourly earnings growth slowed more than consensus expectation.11 Average hourly earnings growth now sits at 4.6% year-over-year compared with 5.6% year-over-year back in March of 2022.12 Perhaps a soft landing after all.

3. Rising job cuts are what’s needed to reverse margin pressure. The bulk of the job cuts so far have been in the tech sector, accounting for 51% of the cumulative job cuts in the fourth quarter of 2022.13 Looking at the margins across sectors this should not be a surprise; tech boasts the highest profit margin across all 11 S&P 500 sectors. But that has been coming under pressure more so than the other sectors (aside from financials), declining from roughly 23.5% in the first quarter of 2022 to 21% most recently.14 This is not the first time we’ve seen a cyclical decline in tech margins, as it occurred in 2019 and 2015 before that. However, margins tended to improve as cost cutting measures were taken. Since May 2022 the tech sector has announced roughly 97,000 layoffs, reduced buyback authorizations, and slashed capex.15 These are exactly the corrective measures that the markets want to see tech companies (and others facing margin compression) take to pave the way for eventual margin and earnings growth improvement. And this is also exactly what the Fed wants to see as the committee pursues a less tight labor market.

Exhibit 3: Profit margins have historically come down during times of an economic slowdown

4. Valuations have reset across sectors and across asset classes. Valuations moved materially lower over the last year, with bond valuations resetting the most on the back of rates rising from 0% to 4.5% through 2022.16 Equities have also reset lower and at current, do not appear as expensive as they were before.17 Within equities, the pockets that needed to correct have now done so. For example, SaaS software has contracted from 20x enterprise value (EV)/ forward revenues in November 2020, to ~5.5x today.18 Semiconductors P/E multiple declined from 23.5x in February 2021 to 17.8x today.19 And publicly traded REITs now trade at a 26.1% discount to net asset value (NAV).20 In private markets we’ve seen venture capital valuation correct, private credit returns decline, and CRE price also started to correct.21

Exhibit 4: Over the past year, valuations have reset materially across asset classes

The price action we saw in the first two weeks of the year suggests that lower treasury yields could help cyclicals and rate sensitive sectors outperform. For example, semis, consumer discretionary and rate-sensitive sectors like REITs led the market on the days when yields were lower across the board. Indeed, our view is that long-term UST yields and their volatility has likely peaked, even if the Fed funds rate hasn’t yet. That is because slowdown in growth/recession and slowing inflation should pressure long-term yields down. As that happens, we suspect there is more of this sector outperformance to come.

The luxury of being both defensive for 1H ‘23 and opportunistic for 2H ‘23

2023 should be the year when consumers and investors get some reprieve from inflation and look for opportunities – across the risk reward spectrum. We do not expect a swift rebound in asset prices, as the tug-of-war between peaking inflation and the Fed that keeps reminding us that they are not done raising rates yet will likely continue for several more months. But, looking 6 months out, if consensus inflation expectations are right, the Fed should have “substantially more evidence of progress to be confident that inflation was on a sustained downward path” and this relief should help support the markets.22

For investors this means that 1H ‘23 can present a significant opportunity to take advantage of the reset in valuations. And the good news is that investors can be both defensive for H1 ’23 and opportunistic for 2H ’23 and beyond. Defensive by holding cash, cash equivalents, and high-quality fixed income, all of which now pay respectable yields, and opportunistic by gradually deploying cash into opportunities like semis, public REITs, and investment grade fixed income, which have seen a large valuation correction. In private markets, our top ideas include committing to distressed private credit, buyout private equity, and opportunistic real estate.

For more insight on our top conviction ideas in the public and private markets, view our 2023 Market Outlook – The Time to Commit: Opportunities in the Public and Private Markets and Private Markets & Hedge Fund Strategy Ratings – Q4 2022.

Was this article helpful?
YesNo

(1) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(2) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(3) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(4) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023. Note: ISM Prices Paid subcategory looks at the percent of respondents indicating they paid more for inputs.
(5) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(6) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(7) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(8) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023. Note: Goods inflation includes durable goods and nondurable goods excluding food.
(9) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(10) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(11) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(12) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(13) Source: Bloomberg, Challenger, iCapital Investment Strategy, as of January 12, 2023.
(14) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(15) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(16) Source: Bloomberg, iCapital Investment Strategy, as of January 12, 2023.
(17) Source: Bloomberg, iCapital Investment Strategy, as of January 9, 2023.
(18) Source: Bloomberg, JPMorgan, iCapital Investment Strategy, as of January 9, 2023.
(19) Source: Bloomberg, iCapital Investment Strategy, as of January 9, 2023.
(20) Source: Bloomberg, JPMorgan, iCapital Investment Strategy, as of January 9, 2023.
(21) Source: Bloomberg, Cliffwater, Pitchbook, Preqin, iCapital Investment Strategy, as of January 12, 2023.
(22) Source: Federal Reserve, FOMC Minutes, as of January 4, 2023.


IMPORTANT INFORMATION

The material herein has been provided to you for informational purposes only by Institutional Capital Network, Inc. (“iCapital”). This material is the property of iCapital and may not be shared without the written permission of iCapital. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital.

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by iCapital. You should consult your personal accounting, tax and legal advisors to understand the implications of any investment specific to your personal financial situation. This material does not intend to address the financial objectives, situation or specific needs of any individual investor. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors.

This material may contain forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. Forward looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Due to various risks and uncertainties, actual results may vary materially from the results contained herein. The information contained herein is an opinion only, as of the date indicated, and should not be relied upon as the only important information available. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. The information contained herein is subject to change, incomplete, and may include information and/or data obtained from third party sources that iCapital believes, but does not guarantee, to be accurate. iCapital considers this third-party data reliable, but does not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. iCapital makes no representation as to the accuracy or completeness of this material and accepts no liability for losses arising from the use of the material presented. No representation or warranty is made by iCapital as to the reasonableness or completeness of such forward looking statements or to any other financial information contained herein.

The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the U.S. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the U.S., where such distribution, publication, availability or use would be contrary to law or regulation or which would subject iCapital to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. It is the responsibility of the recipient of this document to comply with all relevant laws and regulations.

Alternative investment products and services may be offered through iCapital Securities, LLC. Structured investment products and services may be offered through Axio Financial LLC and/or SIMON Markets LLC. iCapital Securities LLC, Axio Financial LLC, and SIMON Markets LLC are each a registered broker/dealer, member FINRA and SIPC, and an affiliate of Institutional Capital Network, Inc. (“iCapital”). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

© 2023 Institutional Capital Network, Inc. All Rights Reserved.

Back to Blog
Anastasia Amoroso

Anastasia Amoroso

Anastasia Amoroso is a Managing Director and the Chief Investment Strategist at iCapital. In this role, she is responsible for providing insight on private market investing opportunities for advisors and their high-net-worth clients. Previously, Anastasia was an Executive Director and the Head of Cross-Asset Thematic Strategy for J.P. Morgan Private Bank, where she identified and invested in emerging technologies and disruptive trends such as artificial intelligence, decarbonization, and gene therapy. She also developed global tactical ideas and implemented institutional-level implementation across asset classes for clients. Anastasia regularly appears on CNBC and Bloomberg TV and is often quoted in the financial press. See Full Bio.