INVESTMENT OUTLOOK FOR 2023 - 10 - MARKETS OUTLOOK MAYA BHANDARI Global head of multi-asset Taking stock 2022 has been an extraordinary year, marking the end of an extraordinary decade and a half since the Global Financial Crisis (GFC). A sharp and swift rise in real discount rates caused bruising losses across asset classes, ending the panacea that ‘lower for longer’ interest rates delivered for risky assets over many decades. For example, an investor in a portfolio of 60% global equities and 40% government bonds had lost an eye-watering 20% by late October. That is a far cry from the 9-10% she or he would have grown accustomed to making over the last 50-odd years. These losses were the steepest incurred in a generation – including 2008, which saw losses of ‘just’ 14%. We, as others, had seen this steep rise in real yields as the chief risk facing financial markets in 2022. Our multi-asset portfolios were short duration, neutral equities (through a combination of long Asia and short Europe), and long commodities for much of 2022. Yet, as sovereign bond yields, particularly real yields, quickly approached post-GFC highs, we took profits on our long-standing short in government bonds. One of the biggest questions for 2023 is how soon central banks will pause, or even reverse, their discount rate increases and what impact this will have on the value of cash flows across asset classes. Certainly in 2022, the bulk of asset market moves can be explained by changes in the discount rate. We are now turning more constructive on corporate credit, particularly higher- grade credit in Europe. Here, we believe low valuations (that is, high spreads), do