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Vanguard Sees Non-U.S. Equities, Emerging Market Bonds as Top Sectors in 2023


Vanguard has released its January 2023 investment and economic forecasts, and there are some interesting projections that all investors should consider. The forecast predicts faster economic growth in China than in the U.S. or Europe. When looking at investments, Vanguard predicts global equities to have the highest return projection for the year amongst all equities.

Vanguard also projects a solid year for bonds, with U.S. high-yield corporate bonds and emerging markets bonds having the highest potential projected return. It should be noted, however, that they both also have double-digit median volatility, nearly doubling all other fixed-income projections. Read on to learn more about Vanguard’s top projections as well as what investments you may want to consider avoiding.

If you’re looking to change up your portfolio in 2023 and don’t yet have a financial advisor, you may want to think about changing that. It is expected to be a difficult investment year to predict, and a financial advisor can help you strategize your positions.

Vanguard’s Top Projections for 2023

Vanguard’s projections are generated by its Capital Markets Model, which measures the likelihood of various investment outcomes. For January 2023 the projections aren’t overly positive for the U.S. market, as Vanguard’s analysts expect the Federal Reserve to hit a federal funds rate of around 5% or higher at some point in the first quarter and then maintain that level for the remainder of the year.

That could really hurt several investment options, such as growth stocks as money becomes more expensive to borrow. Here are some of the other projections by the Vanguard study that could impact your investment decisions:

  • Job Losses: Vanguard expects job losses to continue for months with unemployment hitting as high as 5%.
  • Inflation: The projection for core inflation is around 3%, which is higher than the Fed’s 2% target.
  • Recession: Vanguard believes that there is a 90% probability that the U.S. hits a recession in 2023 with marginal growth of 0.25% for the entire year.

These projections, if they come to pass, would make several markets difficult investment options in 2023. However, Vanguard also provided a list of their projections for each sector of investment and broke them up into either “equities” or “fixed income” categories.

Based on their return projects and the included global economic projections, there are two investment sectors that you may want to consider as potential winners in 2023. These are non-U.S. equities and emerging market bonds.

Non-US Equities

The return potential from Vanguard’s projections shows more return potential for non-U.S. equities than any of the U.S. equity sectors. With a projected return between 7.4% and 9.4%, Vanguard’s model believes that there will be room for growth overseas. Much of this is expected to be driven by China’s growth by removing COVID restrictions and opening up many global supply chains.

Emerging Market Bonds

For fixed-income sectors, emerging market bonds seem like a potentially stronger fixed-income investment than other sectors, according to the study. Vanguard projects a return of 6.4% to 7.4%, having the highest “floor” of any fixed-income projected sector. This is driven by projections of inflation has already hit its peak in emerging market areas and lower than expected interest rate hikes.

Investment Sectors to Avoid

Vanguard 2023 projections

When analyzing potential strong investment options over the coming year, it’s just as important to do some analysis to determine what investments might be worth avoiding. These could either be losing sectors or just ones that aren’t expected to help your overall portfolio as much as other investment options.

U.S. Growth Stocks

With the bleak outlook of the U.S. economy for 2023, it’s no surprise that the U.S. growth stock sector looks less appealing than in years past. If venture capital money and debt both become more difficult to access then the growth of this sector can either decline or grow much less rapidly. While inflation isn’t expected to get worse in 2023, interest rates are projected to get a little worse.

Combine the events happening in the U.S. economy with the fact that traditional high-growth companies in the tech sector have started to lay off large amounts of employees and you get a recipe for very small returns throughout the sector in 2023. There are too many factors that could potentially damage this sector even more if the projections get worse throughout the year to have much faith in this sector.

Treasury Inflation-Protected Securities (TIPS)

Vanguard doesn’t project inflation in the U.S. to grow throughout 2023 which, perhaps, makes TIPS less appealing than they did in 2022. Of all fixed-income sectors, Vanguard has the lowest floor projection on TIPS, meaning that the Vanguard model believes it is likely to grow the least of all included sectors. When inflation isn’t growing then receiving the coupons from a TIPS investment isn’t generally needed to hedge your portfolio.

The sector is considered to be similar to the utility infielder in baseball who comes in at the right spot but may not play in a large number of games throughout the season. Since TIPS  investments typically require a maturity period between five and 30 years, it may not make a lot of sense to throw investment dollars into the sector as inflation is expected to maintain or decrease.

What It All Means

Just like any sailor would adjust the sails as the wind shifts, so too must investors think about how the changing winds of the world’s economy should shift the investment sails they put out. Sectors that carry more risk are more likely to change direction when the economic climate changes, such as inflation increasing or the supply chain adjusting demand around the world.

Vanguard provides a blueprint for what their model suggests will happen this year. It’s a good thing to take under advisement as you’re thinking through what portfolio adjustments you might want to make. However, the best practice for making these tough investment choices is consulting with a financial advisor who has the experience to potentially help you weather any looming storm.

Tips for Investing

  • As you’re trying to figure out what your asset allocation should look like in 2023 and beyond, it can be a great idea to work with a professional. Financial advisors can help you identify the right investments for your financial goals and then monitor your investments against the market to make sure they continue to be the right choices. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • As you’re investing on your own, consider using an asset allocation calculator to look at what could happen to your portfolio depending on the assets you choose.

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