Navigating inflection points—for inflation, rates, and growth—will be key to investment success in the year ahead. (UBS)

As the new year begins, we focus our investment ideas on defensives, value, income, and diversification. But a more favorable backdrop for markets should emerge as 2023 progresses and key inflection points come into view.

We expect markets to remain volatile in the near term.

  • Inflation is still high, and the lagged effect of interest rate rises is likely to weigh on economic growth and corporate earnings.
  • We do not think the economic conditions for a sustained equity market rally are yet in place.
  • As the year begins, we focus our investment ideas on defensives, value, income, and diversification.

But inflection points are likely as the year progresses.

  • History tells us that durable turning points for markets tend to arrive once investors begin to anticipate interest rate cuts and a trough in economic activity and corporate earnings.
  • Investors with the discipline and patience to stay invested in line with longer-term goals should thus be rewarded.
  • Those currently sheltering from volatility will need to plan when, and how, to head back into riskier assets.

Navigating these inflections will be key to investing success in 2023.

  • We like value and defensives, including consumer staples and healthcare stocks. We also prefer high-quality bonds.
  • More attractive opportunities to buy cyclicals and growth stocks may emerge later in 2023.
  • For risk-tolerant investors looking to anticipate the inflection points today, we see select opportunities in early-cycle markets like Germany, and among the likely beneficiaries of China's reopening.

Did you know?

  • The S&P 500 fell 19% in 2022, its worst year since 2008. The tech-heavy Nasdaq fell 33%.
  • Energy was the best-performing S&P 500 sector last year, rising nearly 60%.
  • The Federal Reserve raised interest rates by a total of 425 basis points in 2022.

Main contributors: Vincent Heaney and Alison Parums

Read the original report, UBS House View Briefcase: How should I invest in the year of inflections?, 9 January 2023.

This content is a product of the UBS Chief Investment Office