The economic outlook will remain challenging in 2023. Rapid interest rate hikes from 2022, decades high inflation and the last vestiges of the pandemic are set to cause global growth to fall to  recessionary levels. We see Europe suffering a prolonged recession in 2023 and the US to fall into  recession in the second half of the year. As the Federal Reserve (Fed) nears the end of its hiking cycle  as growth slows, we believe the USD’s powerful climb is set to reverse in 2023. In contrast, by easing  zero-Covid controls and increasing aid for the property sector, China’s GDP growth is likely to pick up  in 2023, marking an important turning point for China’s risk assets. We also keep a watchful eye on  geopolitics, which has implications across sectors due to localisation and reconfiguration of supply  chains. Unexpected escalation of tensions could have profound consequences in areas such as  energy and technology. As volatility remains elevated, the ability to increase diversification is the key  to manage the portfolios.

With the highest duration in global credit, Developed Market (DM) Investment Grade (IG) should  serve as a flight-to-quality destination in event of a recession. We also have a modest Overweight in  US Treasuries (UST) as it has a dual role both as a hedge against a recession and a rally opportunity  in 2H23 if Fed rate hikes end and market starts to expect a Fed pivot in 2024.