iShares 2023 Fall ETF Implementation Guide

• Holding tight: Higher for longer interest rates support allocations to high quality fixed income.
• Pivoting to new opportunities: Equity markets are priced for an optimistic outcome; investors may want to consider steering towards a defensive stance.
• Mega forces, mega soon: Trends such as demographics and artificial intelligence are impacting present day returns, not just in the future.

The first half of 2023 has been characterized by opposing narratives. In the recessionary data camp, we’ve seen a slowdown in the manufacturing sector coupled with tighter credit conditions following March’s banking turmoil. Excess savings rates have fallen, especially in lower income households.¹ On the soft-landing end of the spectrum, however, the labour market remains incredibly robust, with unemployment rates hovering near all-time lows.² Consumer buoyed by stable earnings potential as wage growth remains firmly above the pre-pandemic decade.³

Still, despite divergent signals in the macro data, financial markets kicked off the year with a stellar start — seven of the eleven S&P GICS sectors are in the green, and most financial assets have outperformed cash allocations so far in 2023. While many point to the artificial intelligence (AI) boom as a driver of the market rally, a closer look tells a broader story: the trimmed mean performance of the S&P 500 (removing the top and bottom 10 performers) has returned 8.8%, suggesting that the equity market is pricing in an optimistic outcome on both growth and earnings, in our view.⁴

Figure 1: Total Return Across Asset Classes

We think that outcome is far from certain given the disparities outlined above, but expect the second half of 2023 to be driven by three main narratives:

1. Both the Bank of Canada (BoC) and the Fed nearing the end of their hiking cycles and pausing on rate hikes, which could allow duration in the belly of the curve to return as a ballast in portfolios.
2. Inflation remaining sticky, much above the central banks’ 2% mandate, allowing for interest rates to remain high for the near term. Investors may want to focus on the growing role of bonds as an income generator in portfolios.
3. Corporate profitability coming into question as firms grapple with higher input costs, which means focusing on companies with strong balance sheets and margin resilience remains paramount. We believe that this is an investment regime where nimble asset allocation and a willingness to tweak portfolio positioning to adjust to the macro data is prudent. ETFs can be an important tool to do so efficiently.

Read more about the three key investment themes and ETF implementation ideas in the full report.