Markets are off to a solid start in 2023 as falling inflation, relatively robust economic data, and China’s COVID policy change drive investor hopes of a “soft landing” for the global economy.

The big question now is whether the latest activity readings and China’s reopen­ing mean the current rally will prove durable, or if we face more volatility and uncertainty ahead.

In our Year Ahead report, we said that 2023 would be a “Year of Inflections,” with the timing and magnitude of turning points in inflation, interest rates, and growth shaping the outlook for markets. In our latest monthly letter, we assess the progress of the key inflection points and the implications for positioning.

In short, the backdrop remains one of high inflation, rising rates, and slowing growth.

But at the same time, labor market and inflation data in recent weeks has been encouraging, and we recognize that some parts of the market will reach inflection points before others, meaning dispersion between different geographi­cal markets and sectors is likely to be elevated.

We therefore think selectivity will be rewarded, and our positioning reflects that:

We think China’s reopening should allow for a faster turning point in global growth and prove supportive of emerging market equities and com­modities. We have added a preference for both asset classes this month. We have also added a preference for emerging market bonds, given cooling US infla­tion and China’s policy shift.

Lower gas prices should reduce recession risks in Europe, and we have moved to a neutral view on the euro from least preferred.

In the US, still-tight labor markets mean that investor and central bank concerns about inflation are likely to persistdespite recent declines in price readings. In addition, we do not believe that US equity valuations fully reflect the earn­ings contraction we expect this year. The risk-reward trade-off therefore remains unfavorable for broad US indexes, in our view, and we retain a least preferred stance on US equities and the technology sector.

Elsewhere, within equities, we continue to favor healthcare, consumer staples, and energy. In fixed income, we prefer higher-quality bonds, including high grade and investment grade, relative to high yield credit.

In currencies, we move the Swiss franc down to neutral after strong gains versus the US dollar. Nevertheless, we believe the Swiss National Bank is committed to preserving the franc's strength to limit imported inflation, and that the currency will be supported by safe-haven flows. In the UK, the weak growth outlook and still-high inflation are likely to weigh on sterling, and we maintain our least preferred view. We like the Australian dollar, which should be supported by China’s reopening, relatively strong domestic economic growth, and a central bank that is likely to keep the reins tight when the Federal Reserve is starting to ease monetary conditions.

Read more in our latest monthly letter, “Gauging the inflections,” and watch a short video on the main themes here.