Global equities suffered heavy losses in 2022, driven by the monetary tightening, economic slowdown amid supply-chain bottlenecks, and consequences from the war in Ukraine. While the challenges of the past year are not fully behind us and 2023 has seen concerns rise around financial sector stability, we are seeing improvement on a number of fronts over the medium term. Some of these improvements are already in motion.
In terms of growth, we expect the economy to get worse before it gets better. Expansion in 2023 looks to be modest at best but tailwinds such as China reopening could drive some upside surprises. While inflation has been stubborn, the easing of supply-chain bottlenecks, combined with higher rates, is gradually bringing prices to more acceptable levels. In that context, valuations do not appear overstretched, with the MSCI ACWI IMI Index trading at a 12-month forward P/E of 15.21.
As the investment environment is likely to improve, long-term investors may consider increasing their exposures to equities, to position themselves for that expected recovery ahead of the rest of the market. Indeed, despite multiple contractions during the past 10 years, including COVID and the turbulence we observed in 2022, being invested in equities allowed investors to gain a disproportionate advantage over other asset classes.
MSCI ACWI IMI Index Performance vs. Global Bonds & Equities
There are many global index exposures available – but not all indices are created equal. Looking at the MSCI index family, one of the most popular indices is MSCI World, which includes large and mid-cap companies from the developed world. Another option is the MSCI ACWI, which includes the same companies as the MSCI World in addition to emerging market large and mid-cap equities. Given China’s reopening, we believe this emerging market component is an important part of the equity recovery.
However, arguably the most comprehensive equity exposure is the MSCI ACWI IMI Index, which includes not only large and mid-sized companies but also small cap exposures, covering 99% of global market cap. In the current environment, the small cap element should not be omitted, given valuation advantages and rebound potential.