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11 | 2023 Investment Outlook | December 12, 2022 MULTI-ASSET Rebalancing Acts KEY POINTS 1 The global economy should normalize as pandemic pressures ease. Andrew Harmstone Head of Global Imbalances in labor and energy markets pose a greater inflation risk for Europe Balanced Risk Control than the U.S. (GBaR) Senior 2 Portfolio Manager, Global Multi-Asset China is redoubling efforts at structural reform to put its economy on a path of 3 long-term stability. Labor Pains ƒ With pandemic-related pressures beginning to wane, global rebalancing may be a principal market driver in 2023. We foresee three key areas of rebalancing: labor markets, the energy crisis and China’s structural reform shift. ƒ In developed markets, post-COVID employment conditions have favored workers over employers. Even as growth is slowing, the labor market remains resilient. In the U.S., for example, job openings still sit at high levels, but the number of new positions has come down by 1.15 million from a peak of 5.1 million in March 2022. U.S. wage growth is also normalizing, 1 with the rate running at roughly one-half of its 6.6% high in January 2022. ƒ Labor market rebalancing is likely to be slower in Europe, and risks of a wage-price spiral are higher. Compared to prepandemic levels, indicators such as total employment numbers, hours worked and participation rates have risen more in the eurozone than in the U.S. Labor shortages in the industrial sector should sustain tight employment markets, raising risks that wage increases continue to exert upward price pressures. Evolving Energy Landscape ƒ We expect a transitional year for energy markets. Higher oil and gas prices should combine with slowing economic activity to dampen demand. However, sanctions on Russia are likely to result in tight gas supplies globally. As Russian gas exports look set to fall more sharply next year, we expect that some buyers may switch their energy mix with a move to oil from gas. ƒ OPEC’s recent decision to cut production quotas underscores the role that high prices play to incentivize investment. A fall in prices now could disincentivize investment and spell higher prices when demand recovers. In 2023, we expect prices to be supported in the $90 to $100 per barrel (p/b) range. If China achieves a successful reopening from its zero-COVID policy, normalization of demand could push prices above $100 p/b.

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