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Thornburg Investment Management 2023 Outlook Global Equities

Volatility Will Persist–Focus on Income, Fundamentals and Valuations

Ben Kirby, CFA
Co-Head of Investments and Managing Director
22 Dec 2022
5 min read

Reasonable valuations and weak currencies create an improving landscape for non-U.S. equities and investors shouldn’t overlook the income component of total return.

After a prolonged period of historically easy monetary policy, inflation became the driving force behind markets in 2022. While the reality of the Russia-Ukraine crisis, supply chain disruptions and zero-COVID lockdowns in China had real implications on global equities, they were overshadowed by how aggressively central bankers acted in an attempt to bring down inflation. Stretched valuations deflated significantly in the U.S. and abroad with longer duration growth stocks especially sensitive to rising rates over the past 12 months.

Entering 2023, we continue to navigate through foggy conditions, and the outlook requires an even greater-than-normal degree of humility as portfolio managers. After decades of relative price stability, are we transitioning to a structurally higher inflationary regime, or is this a temporary dislocation due to policy responses during COVID? Will geopolitical frictions among major nations temper, and if not, what are the potential impacts of a less globalized world? In light of such questions we see a distribution of possible outcomes for global equities that have fatter tail risks on both sides. While we expect elevated levels of volatility to persist for the foreseeable future, we also see opportunities for investors amid the fog.

Supported by reasonable valuations, cheap currencies and an anticipated backdrop of broad-based global growth, the setup for international equities looked promising entering 2022. Instead, war in Ukraine stoked inflation and fears of an energy shortage across Europe, lockdowns drove social unrest and stalling growth in China, and the dollar rapidly strengthened as investors sought a haven amongst the uncertainty. As a result, valuations across international equities contracted rather than expanded, cheap currencies got even cheaper and the likely backdrop entering 2023 looks to be a broad-based global recession.

While growth may decline before it gets better across many regions next year, equity prices generally respond sooner to anticipated conditions than the economy itself and a higher degree of bearishness appears priced into many international markets. Looking past the near-term challenges, we see a lot of relative value opportunities outside of the U.S. and expect investors to begin paying attention as fears abate. On a 12-month forward looking basis, international markets are currently trading at a 29% valuation discount to their U.S. counterpart—the widest level in more than 15 years. This is due in large part to relative outperformance of U.S. stocks versus many international markets in a market driven by a higher concentration of technology and mega cap stocks. For long-term investors, we recommend taking advantage of currently cheap valuations and diversifying portfolios outside of the U.S.

Source: Bloomberg. Data as of November 30, 2022.
P/E Discount: MSCI ACWI ex-U.S. Index vs S&P 500 Index: Next 12 months’ Forward


Companies with Earnings Resilience to Navigate through Uncertainty Should Outperform

A rising reopening tide lifted most boats over the past two years, but we expect decelerating growth and tightening financial conditions to increasingly pressure earnings in 2023. We are watching carefully what companies are forecasting in terms of real-time demand for their products and services and how extensively they are shifting expectations. As we end 2022, consensus earnings growth forecasts are still modestly positive across many global markets for 2023, but we see that as a best-case scenario rather than the base case.

Across geographies and sectors, we expect to see an increasing bifurcation in company-level results as economic activity likely slows and are broadly favoring firms that we believe can navigate a lower growth environment. Consequently, we see 2023 as a stock selector’s market, best approached from the bottom-up, focusing on durable businesses and earnings resilience. Against the backdrop of potentially slowing macroeconomic growth, earnings resilience will be key for U.S. stocks. Market participants will be evaluating the ability of U.S. companies to meet earnings expectations and maintain margins given relatively higher valuation multiples.

Earnings Momentum Is Fading as Growth Slows

Source: Bloomberg


Don’t Overlook the Growing Income Component of Total Return

Following a decade of stimulus-driven capital appreciation, it’s easy to forget that over the long-term dividends have contributed roughly half of an investor’s total return from equities. As highlighted over the decades below, the breakdown between price appreciation and income can be highly variable depending on the environment, and leadership changes are difficult to predict.

Income Has Become a Major Contributor to Returns (MSCI ACWI)

Source: Bloomberg


While we don’t have a crystal ball for what the next decade holds for equity investors, following a year of aggressive rate hikes, businesses will once again have to earn their cost of capital in the nearer term. We see the setup as promising for companies with consistent profits and dependable cash flows in excess of their capital investments. We recommend investors consider high quality assets with reliable dividends that can compensate shareholders through the potential volatility of 2023.



Central banks have increased policy rates and signaled upcoming sales of their bond portfolios to arrest inflationary forces, with softer inflation data helping solidify the view that the interest rate peak is near. Geopolitical uncertainty remains elevated. COVID is behind us for now, as China lifted its strict zero-COVID policy in late 2022.

U.S. Equities

US recession risks remains a key focus. Core inflation is likely to remain elevated resulting in mixed moves in US equities. Earnings will be mixed as we move from (potential) recession to recovery. A widening geopolitical gap between west and non-west seems to be codifying, bringing various market risks.

International Equities

Recession in Europe is believed to be a certainty based on high energy costs. However, consumers and businesses are being subsidized by various government sponsored relief packages. Asia is slowing but China could provide a growth boost.

Emerging Markets Equities

Despite a lag in recovery versus developed markets and equal exposure to inflation and macroeconomic uncertainty, many long-term structural drivers remain intact.



Although we expect inflationary pressures to ease, expect volatility in equities to continue. focus on idiosyncratic opportunities/ durable companies across sector/geography where the upside outweighs the downside materially. Companies with pricing power, offering essential services and inflation beneficiaries remain interesting.

U.S. Equities

Balance style risks with durable cyclical & defensive sectors. Equity Income names are likely still beneficiaries. Take advantage of sell offs to find high quality names.

International Equities

Look for idiosyncratic opportunities, contagion from Russia-Ukraine conflict should be limited. Equity income and value-oriented companies show substantial promise in this context.

Emerging Markets Equities

Although concerns around index concentration and geopolitical risks may keep EM volatility elevated near term, select emerging markets provide pockets of opportunity not currently reflected in valuations.

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