Jayson Bronchetti, Chief Investment Officer and head of Risk & Sustainability shares the key market themes to watch in 2023.
As we settle into a new year, we often find ourselves planning for, and trying to predict, what will happen in the year ahead. While none of us can accurately predict the future, what we can do is prepare for resilience in any market environment. For Lincoln’s General Account, this means maintaining a high quality and broadly diversified portfolio that is tailored to maximize income and honor the promises we’ve made to our policyholders. Our investment strategy is focused on the long-term and built for stability regardless of the economic environment. We also recognize that understanding and building views for the upcoming year can enhance our preparedness and help identify opportunities. With this in mind, I’ll share the key market themes we are watching closely in 2023.
In 2022, global capital markets experienced significant changes and challenges, characterized by persistently high inflation, sharply rising interest rates and negative returns for most asset classes. There was considerable debate around the Fed’s ability to navigate a “soft landing” or if aggressive actions to restrict monetary policy would result in a “hard landing” for the economy. As the economic data is rolling in, so far in 2023, it has been more supportive of a potential soft landing and markets have reacted accordingly. That said, risks remain and even a potential “no landing” scenario may bring its own set of challenges as it could provide cover for central bankers to maintain a more restrictive policy stance.
Key 2023 macroeconomic themes:
Disinflationary Process Underway: We believe inflation has peaked and is on its course of decline from the high levels experienced in 2022, especially in the U.S. As of February 23, 2023, the US TIPS market signaled that market participants expect inflation to decline to ~3% by the end of 2023. This suggests that the Fed could ultimately have a little more work to do in order to achieve their objective for price stability, but the disinflationary process is well underway.
Decelerating rate hikes: Thanks to the decline of inflationary pressures, we may be able to put the recent string of aggressive interest rate hikes behind us as well. The Fed projected an equivalent of three more 25 basis point hikes in 2023, before hitting a terminal rate of 5.1%. At that point, the Fed is likely to pause and allow the impact of tighter policy to make its way through the economy. Therefore, the pause, if not the end, of the Fed rate hike cycle is approaching. However, restrictive monetary policy may remain in effect throughout the year with continued high interest rates, testing the strength of the U.S. economy. The era of free money is likely behind us.
Looming risk of recession: If we do end up entering a recession, it is the consensus view that the recession will likely be relatively mild. However, a recession is not a forgone conclusion. Many indicators support the recession narrative, including the 2-year vs. 10-year yield curve inversion, which preceded each of the past seven recessions, and has hit the deepest level since the 1980s. Personal savings rate for American households has fallen to a 17-year low of only 2.3% recently, and corporate earnings, housing market and manufacturing activities have all been showing signs of weakness. That said, the U.S. labor market continues to be strong, and corporate and consumer balance sheets remain healthy and resilient which supports the rationale for a soft landing or a mild recession.
2023 Investing themes:
Maintaining a high-quality portfolio: All in yields are attractive and spreads are near historical averages. We are maintaining a high-quality portfolio with approximately 3% allocation to below investment grade securities. This is the lowest percentage of below investment grade securities we’ve had in the last decade and feel the portfolio is well positioned for a potential recession. Our conservative positioning provides us with the ability to play both offense and defense as we have capacity to selectively add credit risk as attractive opportunities arise.
Adding nonpublic corporates for diversification and attractive spread premiums: Our nonpublic corporate bond purchases are focused on private debt, private equity, mortgage loans and structured securities. These asset classes offer a combination of strong covenants, diversification, and attractive spread premiums over similarly rated public corporates. Our multi-manager platform and partnerships with specialized managers, provides us with sourcing, underwriting, and asset management expertise to add value in these asset classes. Additionally, we have an experienced commercial mortgage loan team with a strong track record of success. Within commercial loans, we continue to focus on industrial and multi-family while being selective in both retail and office property types.
Keeping Asset Liability Management discipline: Managing the timing of expected cash flows from both our investments (the assets) and the products we sell (the liabilities), puts us in a position of strength to meet our obligations in any market environment. In 2023, we expect to continue to maintain our allocation to shorter duration assets which reflects our product sales and disciplined asset liability matching approach.
The most important thing to remember is that market fluctuations are normal, so we maintain a focus on the long-term goal. When we think about navigating market cycles from a corporate investment or a personal finance perspective, a best practice is to build a thoughtful strategy and stay the course — while it can be difficult, buckle in for the long-term instead of reacting emotionally. The key to investing for long-term goals is time.
About the Author: Jayson Bronchetti
Jayson Bronchetti is executive vice president, chief investment officer (CIO), head of Risk & Sustainability at Lincoln Financial Group and president of Lincoln Investment Advisors Corporation. He is a member of Lincoln Financial’s Senior Management Committee and serves as the primary investment officer to Lincoln’s board of directors and senior management team on all investment-related matters. He is responsible for the executive leadership, oversight and strategic direction of more than $300 billion in assets across both the general account portfolio and the separate account mutual fund complex. Bronchetti is also the chairman of the board of directors of the Lincoln Variable Insurance Product Trust family of over 100 mutual funds.
As enterprise CIO, Bronchetti leads a team of portfolio managers, research analysts, risk managers and client investment strategists. The team is focused on portfolio construction, asset allocation, due diligence of sub-advisors, and development of equity, fixed income and alternative investment strategies.
Bronchetti also oversees Lincoln Financial’s Chief Risk Office, which is responsible for enterprise risk management, operational risk management and the company’s $100 billion market risk hedging program.
In addition, Bronchetti is responsible for oversight of the company’s Chief Sustainability Office, and he is a director on the board of the Lincoln Financial Foundation, which is responsible for the company’s philanthropic efforts focused on financial wellness, youth education and human services.
Prior to Lincoln Financial, Bronchetti served as executive director of debt capital markets for J.P. Morgan. He has also held positions in private equity and fixed income asset management, trading, and investment banking with Macquarie Investments and Bank of America.
He currently serves on the board of directors of CITRS, Inc., a 501(c)(3) charitable organization focused on the advocation of character education and development. He co-founded the Chartered Alternative Investment Analyst (“CAIA”) Society of Philadelphia and has served as a board member on several private equity owned companies.
Bronchetti received his bachelor’s degree in finance, with a minor in economics, from Miami University in Oxford, Ohio. He is a graduate of the Executive Development Program at the Wharton School of the University of Pennsylvania. Bronchetti is a member of the CFA Society of Philadelphia, and holds his Series 7, Series 79 and Series 63 securities licenses.
Forward-looking statements may be subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. These views are not based on any particular financial situation, or need, and are not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific strategy, product or service.
Lincoln Investment Advisors Corporation (LIAC) is the subsidiary of The Lincoln National Life Insurance Company responsible for analyzing and reviewing the investment options within Lincoln variable products, providing recommendations regarding these options to Lincoln senior management. LIAC also serves as a Registered Investment Advisor, selecting asset managers and constructing model portfolios for use by financial professionals.