Brighter Days Ahead? - Q1 2023

Brighter Days Ahead?

There is growing optimism that investors will fare better in 2023 than they did in 2022. The caveat is that better does not necessarily mean this year will be an especially good one for markets or that it will be easier to navigate. One headwind that could prevent the typical bounce back year often seen following bear markets is simply starting valuations. Following last quarter’s rally, many markets appear mispriced for recession in the US and Europe, which looks increasingly unavoidable. Nonetheless, it is unlikely that all major asset classes will end the year negative, as they did in 2022.

Additional highlights

• Pension Solutions Monitor: We estimate that pension funding ratios increased over the fourth quarter of 2022. Based on market movements, the average funding ratio is estimated to have increased from 95.6% to 98.3%.
• Fixed Income: As we begin 2023, fixed income investors are scrambling to find their bearings in this brave new world with one overarching inquiry top of mind: Will asset prices remain under duress or have valuations sufficiently baked in the new state of play?
• Equities: Our general characterization of equity markets may be nothing more inspiring than, “uncertain.” However, we maintain our slightly bearish tilt, as the balance of the aforementioned dynamics shift the distribution of possible returns unfavorably, in our view.
• Solutions: Navigating the uncertain times ahead can be aided by the usage of equity collar strategies that narrow the range of possible outcomes. Backed by historically attractive options market dynamics, now may be the right time for pension plans to consider deploying these strategies to help mitigate the risks of volatility. If options usage is new to your plan, we at LGIM America welcome the opportunity to provide additional insight and education concerning these strategies.