The Banking Executive Magazine - January 2023 Issue

Global Markets Outlook 2023 tive investments”. Generally speak- ing, the more “alternative” an invest- ment is, the more illiquid and the riskier it tends to be. The diversity of available invest- ments creates complications. Ex- change-traded funds (ETFs), for example, trade on exchanges, just like stocks. However, ETFs may be composed of investments from one or more of the five basic asset classes. An ETF that offers exposure to the energy market may be com- posed of investments in oil futures and in stocks of oil companies. Diversification is the practice of re- ducing overall risk by spreading in- vestments across different asset classes. There is typically little corre- lation, or an inverse or negative cor- relation, between different asset classes. During periods of time when equities are performing well, bonds, real estate, and commodities may not be performing well. However, during a bear market in stocks, other assets, such as real estate or bonds, may be showing investors above-av- erage returns. Investments in one asset class can be hedged to reduce risk exposure, by simultaneously holding investments in other asset classes. Asset alloca- tion is the practice of reducing in- vestment portfolio risk by diversifying investments across differ- ent asset classes. Risk-averse investors invest only in relatively safe asset classes. Stock in- vestors commonly diversify by hold- ing a selection of large-cap, mid-cap, and small-cap stocks. Alternately, they may seek diversification through investing in unrelated market sectors. High-risk tolerance investors care very little about diversification, and are just focused on trying to identify the asset class that currently offers the highest potential profits. GLOBAL MARKETS DRIVERS IN 2023 According to world experts’ fore- casts, the global market drivers in 2023 will be: • Inflation and recession: Inflation was the top market driver in 2022. Prices around the globe soared, driving central banks to collec- tively hike interest rates more than 300 times. In the United States, in- flation hit a four-decade peak. In- flation and fear of recession will remain the main drivers of the global markets in 2023. • China’s zero-Covid policy: China shutdown for significant periods of time over the past three years is im- pacting businesses and citizens and global trade. • Russia and Ukraine war: Russia war in Ukraine is a prolonged war ISSUE 169 JANUARY 2023 the BANKING EXECUTIVE 37