Asset Managers’ Outlook for 2023

In what may be one of the toughest economic environments in decades, investors are more keen than ever to generate returns.  

Vanguard analysts are predicting that “rapid monetary tightening aimed at bringing down inflation will ultimately succeed, but at a cost of a global recession in 2023,” while BlackRock’s iShares Head of Strategy Gargi Chaudhuri warned that “we are bound for the most well-advertised economic slowdown in recent memory.”  

As the Federal Reserve maintains its commitment to bringing inflation to its 2% target, and the war in Ukraine continues, asset managers are also looking for bright spots amid the gloom and ongoing market volatility. 

Here’s what the five largest ETF asset managers are seeing right now:  

BlackRock, Inc.’s iShares Unit: $2.3 trillion managed over 396 U.S.-listed ETFs 

Key Takeaway: Bonds are a big focus this year, as the emerging fixed income environment is creating opportunities in high quality bonds and mortgage-backed securities.  

Gargi Chaudhuri, head of iShares Investment Strategy in the Americas, highlighted a “shift back into fixed income, as it returns as an investable asset class” in the firm’s 2023 Investor Guide. She went on to point to more opportunities in high quality fixed income vehicles after a “rapid” increase in yields.  

Also in focus are opportunities in agency mortgages.  

“Mortgage-backed securities have suffered this year from the sharp rise in mortgage rates and pressures from the Federal Reserve’s balance sheet runoff,” she noted. “However, U.S. mortgage-backed securities—including those issued by government-sponsored agencies such as Ginnie Mae, Fannie Mae and Freddie Mac—have a current yield over 4.6%, a level not seen since the Global Financial Crisis.” 

Still, there are still opportunities in equity markets.  

“Investors can also capitalize on the higher inflation theme in equity markets by focusing on infrastructure stocks, which tend to hail from value-oriented sectors like utilities, industrials and materials,” Chaudhuri added. 

The Vanguard Group Inc.: $1.9 trillion across 81 U.S.-listed ETFs  

Key Takeaways: Fixed income markets are set to offer higher returns, and don’t discount equities quite yet.  

U.S.-listed bonds are set to be high-returners, which is an enticing portfolio-add, according to Vanguard analysts.  

“We now expect U.S. bonds to return 4.1%-5.1% per year over the next decade, compared with the 1.4%2.4% annual returns we forecast a year ago,” Vanguard analysts said in the company’s economic and market outlook for 2023 in reference to the domestic fixed income market. “This means that for investors with an adequately long time horizon, we expect their wealth to be higher by the end of the decade than our year-ago forecast would have suggested.” 

Yet equity markets remain resilient. 

“Globally, our equity return expectations are 2.25 percentage points higher than they were at this time last year,” the outlook read. “Within the U.S. market, value stocks are fairly valued relative to growth, and small-capitalization stocks are attractive despite our expectations for weaker near-term growth.” 

State Street Corp.: $1 trillion across 141 U.S.-listed ETFs  

Key Takeaways: Dividends are your friends, and there are opportunities to be found in U.S. small cap stocks and emerging market local debt. 

Despite a projected lackluster earning season to come, State Street identified dividends a sure bet.  

“Dividend stocks thrive in prolonged inflation-driven markets,” said Michael Arone, chief investment strategist at State Street and Matthew Bartolini, head of SPDR Americas Research in their 2023 outlook.  

“Given that dividend payments are more stable than stock price movements—providing an income cushion for total return—dividend strategies have had reduced drawdowns and lower volatility during bear markets, on average,” they added.  

Small cap stocks and emerging markets could be a bright spot in the coming year, as well, Arone and Bartolini said in the outlook.  

“Small caps haven’t witnessed the same degree of negative earnings sentiment,” they noted, adding, “if a policy pivot turns market pessimism to optimism and risk aversion declines,” segments, such as small cap stocks, may be enticing. 

Meanwhile, the possibility of the dollar softening “would be net positive for EM local debt.” 

Invesco: $326 billion across 242 U.S.-listed ETFs 

Key Takeaway: Smart beta outlook remains strong in 2023  

Smart beta strategies, which use a method of alternative index construction, will be key in the current market environment, according to Invesco’s strategists.  

“Looking ahead to 2023, we still see a favorable outlook for smart beta as potential protection against volatility,” Nick Kalivas, head of factor and core equity ETF strategy, told ETF.com. “If we look ‘under the hood’ of the U.S. equity market, there is a lot of activity that would benefit smart beta strategies.”  

“Valuation of the S&P 500 Index is aligned with historical averages, and concentration remains elevated at levels seen in 1999 at the peak of technology bubble,” he noted. “The potential for future decline in concentration and a bottom in the S&P 500 with a discount valuation may benefit factor-weighted investing.”  

Charles Schwab Corp.: $266 billion across 29 U.S.-listed ETFs  

Key Takeaways: ETF popularity is set to continue along with direct indexing; also, keep an eye on specialty ETFs  

Charles Schwab projects growth for the ETF industry, as investors navigate increasingly complex and volatile markets.  

“Sustained interest among current ETF investors combined with interest from those who have never invested in ETFs is a very promising sign for more growth ahead,” said David Botset, managing director, head of equity product management and innovation, Schwab Asset Management, in Schwab’s ETF and Beyond survey.  

According to the survey, 35% of investors said they would increase money into ETFs during periods of heightened inflation, while 38% said they would increase investment into ETFs during times of market volatility. The survey also stated that specialty ETFs, dividend, long/short, leveraged and actively managed ETFs are “expected to be the most popular over the next year.”  

Meanwhile, 46% of ETF investors are interested in learning more about direct indexing, with almost one-third of ETF investors “very likely to invest in direct indexing in the next five years.” 

Contact Shubham Saharan at [email protected]