Stagflation. Liquidity Management. China.
To say 2022 was a challenging year for investors would be an understatement. We watched the two pillars of portfolio diversification – stocks and bonds – plunge in unison and saw long-simmering geopolitical tensions begin to bubble over.
Looking ahead to 2023, we asked members of the Canadian Leadership Congress Advisory Board to tell us what they’re most concerned about heading into 2023.
Here’s what they had to say.
My biggest concern continues to be the persistent high inflation we are seeing and, in particular, how it is creeping into wage settlements. The expectation of higher inflation will lead to increased expectations for cost of living wage increases, which leads to continued high inflation.
I expect that this will cause central banks to move rates higher than the markets are expecting and they will persist with higher rates for an extended period. This will probably result in a protracted slowdown and, quite likely, a reasonably hard landing and recession – so stagflation. The last period of stagflation in the 1970’s saw the equity markets producing no returns over a 10 year period.
Virtually all pension plans use equity return expectations of around 7.5%. If that turns out to be zero, then even the best funded plans would face a funding deficit.
Jim Keohane, Member of the board of directors, AIMCo
Geopolitical uncertainty will create an environment that will constrain the much-needed investment to maintain global economic development.
My concern is the level of Canada’s Asia competence to navigate the realities of the main engines of growth for this and the next five years: China and India. What can we do in the short term to deal with this long-term challenge?
Stewart Beck, Former CEO, Asia-Pacific Foundation
In 2023 pension plans will continue to focus on the relationship between stock and bond markets. With these markets moving in the same direction, if they both drop further, the focus on cash and liquidity management will have to continue.
Pension plans need to determine how to manage the “denominator effect” of 2022 whereby many have reached or exceeded long-term policy target weights for private assets.
Will overweights be permitted to persist or will more plans be forced to liquidate?
Marlene Puffer, Incoming Chief Investment Officer, AIMCo
My top concern (besides unpredictable geopolitical risk) is sustained stagflation.
While the markets probably have discounted lower or even negative growth – there seems to be a consensus that we are quickly going back to the old low inflation world.
There is plenty of room for negative surprises on that view.
Poul Winslow, Retired senior managing director, CPPIB
The past few years have taught us how quickly the world can change.
As we head into 2023, we are faced with many challenges and opportunities, some of which we can anticipate, and some of which we cannot.
My top priority is ensuring our portfolio is positioned to deliver returns for the long-term retirement security of our members even when the unexpected materializes.
James Davis, Chief Investment Officer, OPTrust
I think the biggest gap of all is in connection with helping individuals with decumulation education and arrangements, in DC plans.
It seems to be very tough to interest institutions in explicitly helping their about-to-retire participants to make either individual arrangements or even a group default option.
Don Ezra, Former Co-Chair, Global Consulting, Russell Investments