Morgan Stanley
  • Research
  • Nov 22, 2022

2023 Global Investment Outlook: A Year for Yield

In an environment of slow growth, lower inflation and new monetary policies, expect 2023 to have upside for bonds, defensive stocks and emerging markets.

Investors may find themselves a bit whiplashed in 2023 as inflation and some of this year’s other dominant market trends fully reverse themselves, according to the 2023 Strategy Outlook from Morgan Stanley Research.

“For markets, this presents a very different backdrop than 2022, which was marked by resilient growth, high inflation and hawkish policy,” says Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. “Overall, 2023 will be a good year for income investing.” Bonds—the biggest losers of 2022—could be the biggest winners in 2023, as global macro trends temper inflation next year and central banks pause their rate hikes. This is particularly true for high-quality bonds, which historically have performed well after the Federal Reserve stops raising interest rates, even when a recession follows. Similarly, emerging market equities and debt, which were early to underperform in this economic cycle, could be early to recover in the next, as was the case after the dotcom bust of the early 2000s and in 2009 following the financial crisis. 

Other key takeaways from our 2023 Strategy Outlook:

  • 10-year Treasury yields will end 2023 at 3.5% vs. a 14-year high of 4.22% in October 2022.
  • With favorable pricing, securitized products, such as mortgage-backed securities, will offer upside.
  • S&P 500 will tread water, ending 2023 around 3,900, but with material swings along the way.
  • U.S. dollar will peak in 2022 and declines through 2023.
  • Emerging-market and Japanese equities could deliver double-digit returns.
  • Oil will outperform gold and copper, with Brent crude, the global oil benchmark, ending 2023 at $110.

Overall, investors will need to be more tactical and pay close attention to the economy, legislative and regulatory policy, corporate earnings and valuations, says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. “Because we are closer to the end of the cycle at this point,” Wilson says, “trends for these key variables can zig and zag before the final path is clear.  While flexibility is always important to successful investing, it's critical now.”

Yield on a multi-asset income portfolio has rarely been this attractive, according to Morgan Stanley analsyts. 

Source: Haver Analytics, Morgan Stanley Research forecasts

Bonds Make a Comeback

In 2023, with interest rates set to decline, conditions bode well for stable and attractive bonds, as prices move in the opposite direction of yields. Morgan Stanley fixed-income strategists forecast high single-digit returns through the end of 2023 in German Bunds, Italian Government bonds (BTPs) and European investment-grade bonds, as well as in Treasuries, investment-grade bonds, municipal bonds, mortgage-backed securities issued by government sponsored agencies and AAA-rated securities in the U.S.

However, investors should keep a close eye on quality. U.S. high-yield corporate bonds may look enticing, but they may not be worth the risk during a potentially extended default cycle. “We are wary of unfinished business with high-yield” says Global Director of Fixed Income Research Vishy Tirupattur.

Conversely, securitized products, such as mortgage-backed securities, auto-backed securities and collateral debt obligations, could offer income opportunities. Spreads—or the excess yield versus low-risk government bonds with similar maturities—are the widest they’ve been since the pandemic. Meanwhile, rising rates are limiting the supply of new securities coming on the market.

This is particularly true for agency mortgage-backed securities. “Not only are they the most liquid asset, they’re also starting from the most attractive valuation. Nominal spreads on mortgages produced today have not been this wide since the fourth quarter of 2008,” says Tirupattur. “Additionally, slowing housing activity will shrink the net supply of these securities.” 

Trends Point to High-Yield Equities

Equities next year, however, are headed for continued volatility, and we forecast the S&P 500 ending next year roughly where it started, at around 3,900. “Consensus earnings estimates are simply too high, to the point where we think companies will hoard labor and see operating margins compress in a very slow-growth economy,” says Wilson. To that end, investors should consider the higher-yielding parts of the equities market, including consumer staples, financials, healthcare and utilities.

European equities could offer a modest upside, with a forecasted 6.3% total return over 2023 as lower inflation nudges stock valuations higher. “This should ultimately more than offset the 10% earnings-per-share decline we expect from weaker top-line growth and material margin disappointment,” says Graham Secker, Head of European and U.K. Equity Strategy. Financials and energy are more likely to perform well in this environment, he says.

Emerging Markets and Japan Early to Recover

This has been a major bear market for emerging market, but the tide could be turning, says Jonathan Garner, Chief Asia and Emerging Market Equity Strategist.  “Valuations are clearly cheap, and cyclical winds are shifting in favor of emerging markets as global inflation eases more quickly than expected, the Fed stops hiking rates and the U.S. dollar declines,” he says, says, adding that over the last several economic cycles, emerging markets have recovered before U.S. markets .

In particular, investors should keep an eye on:

  • Mid and large-cap companies: The MSCI EM, an index of mid and large-cap companies in 24 emerging markets, could see 12% price returns in 2023. Japanese stocks, meanwhile, could benefit from a combination of low valuations and idiosyncratic tailwinds—translating to 11% gains for the Tokyo Stock Price Index next year.
  • Emerging market debt: Another potential bright spot, EM debt could benefit from a combination of trends—including declining rates, improving economic fundamentals and a weakening dollar. Fixed-income strategists forecast a 14.1% total return for emerging market credit, driven by a 5% excess return and a 9.1% contribution from falling U.S. Treasury yield. Emerging market local currency denominated debt should see an even stronger total return of 18.3%.

The Bull/Bear case outlook for global equities. 

Index Current Price New Target Price - Dec 2023
(% from current levels)
Bull Base Bear
S&P 500 3,956 4,200 3,900 3,500
6% -1% -12%
MSCI Europe 1,740 2,060 1,790 1,485
18% 3% -15%
TOPIX 1,937 2,450 2,150 1,670
27% 11% -14%
MSCI EM 890 1,130 1,000 730
27% 12% -18%
Source: Bloomberg, Haver Analytics, Morgan Stanley Research forecasts

For more Morgan Stanley Research insights and analysis on the Global Macro Economy, ask your Morgan Stanley representative or Financial Advisor for the full report, “The Year of the Yield" (Nov. 13, 2022). Morgan Stanley Research clients can access the report directly here. Plus more Ideas from Morgan Stanley’s thought leaders.