SLOWLYSLOWING

2023

GLOBAL
MARKETOUTLOOKI’m pleased to share our Q3 update to our2023 Global Market Outlook.
Equity markets have been melting up post the debt-ceiling resolution
and banking fears subsiding in the U.S. Pair that with AI enthusiasm,
still plenty of cash on the side-lines and resilient economic growth, andwe can see a path where stocks are supported in the near-term as the
economy continues to slow down, slowly.
Despite that, we see risk skewed to the downside. As a result, weare more neutrally positioned and keeping an eye on key indicators,
including the impact of liquidity coming out of the markets. We still thinka recession is likely, but it may be delayed until 2024, with potential
tipping points linked to increased pressure on corporate profits andhouseholds eating through $500 billion in excess savings.
While markets could move upward during the second half of the year,
today’s markets demonstrate why it is important for investors to havea strategic plan. Many of our current discussions with clients centre
around cutting through the noise and focusing on the strategic decisions
that need to be made now to keep them invested in this still-challenging
market. It is important for us to be thoughtful and patient about making
portfolio changes, taking into account various inputs including cycle,
value and sentiment drivers and portfolio-specific considerations.
So, what does all this mean? Andrew Pease, our Global Head ofInvestment Strategy, and his team help put some framing around thispush and pull in the markets today and explain why these insights matterfor investors.

Kate El-Hillow
President & Chief Investment Officer

2 /2023 Global Market Outlook – Q3 update / Russell Investments

The U.S. economy is defying predictions of a 2023 recession. We think a recession
is likely, but it may be delayed until 2024. Inflation is receding only slowly, andcentral banks have still not finished tightening. We are positive on government
bonds. Enthusiasm for artificial intelligence (AI) and resilient economic growth
can support stocks in the near term, but longer-term headwinds are building.

INTRODUCTION
A character in Ernest Hemingway’s novel The Sun Also Rises,when asked how he went bankrupt, answers “gradually, thensuddenly”. This is a good description of the U.S. economic
outlook. Forward-looking recession indicators such as theinverted yield curve, tighter bank lending standards, weak
manufacturing activity and depressed consumer confidence
readings are all flashing warning signs. Meanwhile, measuresof real economic activity such as jobs growth and householdspending are only gradually moderating.
Most of the other major economies are also slowing and at
risk from aggressive central bank tightening. Growth in the
eurozone is buckling under a steep decline in bank lending,and persistent inflation is forcing the Bank of England totighten further despite the lack of UK economic growth.
China’s growth impulse is faltering following the postpandemic lockdown surge. Japan remains an outlier, wheremonetary policy is still ultra-accommodative and grossdomestic product (GDP) growth is likely to remain above
trend.
This creeping slowdown in the United States seems likely topersist for a few more months. Households still have around$500 billion in excess savings built up during the pandemic,
corporate profits are stabilising, and housing indicators suchas the National Association of Home Builders index havebounced off lows. Manufacturing output could receive a
temporary boost as inventories are rebuilt from currently low
levels.

1

The stresses from tight U.S. Federal Reserve (Fed) policy
are apparent from the regional bank collapses earlier inthe year and rising delinquency rates for credit cards andautomobile loans. Standard and Poor’s reported that corporatebankruptcies for the year to May are the highest since 20101.
The uneven economic data means that a further Fed rate
hike cannot be ruled out. We think the 500 basis points oftightening so far is enough to bring inflation back to target
and significantly slow the economy. Further Fed tightening, in
our view, will increase the risk of recession.
A recession in the United States seems probable over the
next 12-18 months. The tipping point will likely comewhen corporate profit pressures force firms into austerity
measures such as layoffs and capital expenditure delays, andhouseholds – having exhausted pandemic savings – respondby cutting back on discretionary spending. The industry
consensus, as surveyed by Reuters in June, has a recession
starting in the final quarter of 2023. This is possible, but wesuspect that the gradual and uneven pace of the downturn
could delay the recession until sometime in 2024.
A later recession should be a milder recession for the simple
reason that by 2024 inflation should have fallen by enough toallow the Fed to ease aggressively. A recession that starts in
2023 while inflation is still above the Fed’s target would limit
the pace of easing.

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-corporate-bankruptcies-tick-up-in-may-year-to-datetotal-highest-since-2010-75997788

Russell Investments / 2023 Global Market Outlook – Q3 update/ 3

U.S. IS LEADING THE INFLATIONDECLINE
Headline inflation has peaked in most regions. The biggest contributor is thedecline in energy prices, with oil prices down from $130 per barrel just after
Russia’s invasion of Ukraine to $70 per barrel in mid-June.
Core inflation, which excludes food and energy, is proving
stickier, but it has begun to turn lower in the United States.
This trend should persist as supply bottlenecks clear and as
rental and used car prices continue to normalise lower. The
main barrier to inflation returning to the Fed’s 2% target isthe nearly 6% growth in wages. This is falling only gradually
but should trend lower as the heat comes out of the labour
market.
Core inflation in Europe has largely been driven by thesecond-round effects of last year’s big increases in oil and gas
prices. Energy inflation has flipped from a high of 44% earlylast year to negative 2% in the 12 months to May 2023. We
expect this should drive a significant decline in core inflationin coming months.

The message from inflation trends is that the Fed is close tofinished with rate hikes, and the European Central Bank (ECB)
may soon be finished if, as we expect, core inflation starts
trending lower. The Bank of England (BOE), however, has themost challenging task with core inflation yet to peak. Futures
markets have priced more than 100 basis points of further
BOE tightening by early 2024. This may be an overestimate
given that the overall economy is barely growing, but the BOE
is likely to be the last major central bank to pause rate hikes.

UK core inflation, however, is likely to lag the declines in the
U.S. and Europe. Wages are still rising and the labour market
remains tight due to falling participation rates and worker
skills shortages resulting from Brexit.

A recession in the United States seems probable over the next
12-18 months.
Andrew Pease, Global Head of Investment Strategy

4 /2023 Global Market Outlook – Q3 update / Russell Investments

Global inflation rates have peaked in major economies
%
10

8

6

4

2

0

-2

2015

2016

US: 4%yy

2017

2018

UK: 8.7%yy

2019

2020

Euroland: 6.1%yy

2021

2022
Japan: 3.5%yy

Source: Refinitiv® DataStream®,
as of 23 May 2023. yy =year-over-year, which means
comparing results from a time in
one year to the same time in theprior year.

Source: Refinitiv® DataStream ®, as of May 23, 2023. yy = year-over-year, which means comparing results from a time in
one Global
year to thesame timein the prioryear.are proving stickier"core"
inflation
rates

%
8

6

4

2

0

-2

2015

2016

US: 5.3%yy

2017

2018

UK: 6.8%yy

2019

2020

Euroland: 5.3%yy

2021

2022
Japan: 4.1%yy

Source: Refinitiv® DataStream®,
as of 23 May 2023.

Source: Refinitiv® DataStream ®, as of May 23, 2023.

The message from inflation trends is that the Fed is close tofinished with rate hikes.
Andrew Pease

Russell Investments / 2023 Global Market Outlook – Q3 update/ 5

AI EXCITEMENT IS BUILDING
Megacap stocks are once again dominating the performance of the U.S.
equity market. This time it is driven by excitement around generative artificial
intelligence technologies such as ChatGPT. The year-to-date return of the top
seven technology stocks through 15 June has been 65%. Nvidia has posted a
190% return and Apple’s market capitalisation now exceeds that of the entire
small-cap Russell 2000® Index.
The S&P 500 has returned 16.2% so far this year. However,excluding the magnificent seven, the return has been just
3.8%.
ChatGPT’s release late last year triggered a wave ofpredictions about how transformative the new generative
artificial intelligence technology will be. Goldman Sachs
thinks AI could lift U.S. labour productivity growth by 1.5%
per annum over the next decade and boost corporate profit
margins by 400 basis points.

There is also the question of whether AI will turn into a
speculative mania in the manner of the 1990s tech bubble.
The gains for companies such as Nvidia and Meta this year
can in part be explained by large increases in their earnings
expectations. Aggressive Fed tightening and the risk ofrecession are likely to keep the lid on AI euphoria for now.
The return of low interest rates and easy money in the next
cycle could be the trigger for an episode of speculative
excess. AI is still in its infancy and will be one of the key
investment themes to monitor going forward.

These forecasts are speculative, but it’s hard not to be excitedby the potential of AI. The effects of AI could occur faster thanin previous technological revolutions such as the introductionof electricity, roads and the internet. These previous
episodes depended on scale and network effects to become
transformative. Use of AI, by contrast, is increasing quickly
and the effects on growth and productivity may occur in years
rather than decades.
Identifying the investment winners and losers from AI is notclear-cut. AI runs on computer processing power and data, so
specialised chipmakers are likely to be beneficiaries, as wellas companies that have access to large amounts of computing
power, cloud storage and data. There are also likely to belosers as existing technologies are rendered obsolete. Anotherissue is whether AI will produce the monopoly power andprofits that the current tech giants enjoy from networking
effects and scale of economies. The gains may end up more
evenly shared between the users and creators of AI.

6 /2023 Global Market Outlook – Q3 update / Russell Investments

Technology mega-cap stocks have dominated U.S. market returns
165

Index level on January 2 = 100

155
145
135
125
115
105
95
January 2023

February 2023

S&P 500

March 2023

April 2023

S&P 500 ex. Magnificent 7

May 2023

June 2023

Magnificent 7 Tech Megacaps*®
®
Source:Refinitiv®
DataStream®,
Investments'
calculations,last observation
as ofJune 2023. *The
Source:Refinitiv
DataStream, RussellRussell
Investments’calculations,last observation
as of June
15,15
2023.
(Google), Amazon,
Amazon, Tesla,
Tesla,Nvidia,
Nvidia,andandMicrosoft.
Microsoft.
*TheMagnificent
Magnificent77isiscomprised
comprised ofof Apple,
Apple, Meta
Meta Platforms,
Platforms, Alphabet
Alphabet (Google),

The effects of AI could occur faster than in previous technologicalrevolutions such as the introduction of electricity, roads and theinternet.
Andrew Pease

Russell Investments / 2023 Global Market Outlook – Q3 update/ 7

REGIONAL SNAPSHOTS
United Kingdom
Malaise is the best description of the UK
economy. GDP has barely grown over the
past year and is still lower than before thepandemic in 2019. Core inflation continues
to move higher, hitting 6.8% in April. The
unemployment rate has edged up slightly, but
at 3.8% is still at levels last seen in the 1970s.
The combination of sluggish growth, rising
inflation and a tight labour market points toan economy that is constrained on the supply
side. The UK has had a smaller post-pandemic
recovery in labour market participation thanthe U.S. or the eurozone. Sickness and early
retirement explain much of the labour-supply
gap. Brexit has also had an impact in terms ofskills mismatch, with European workers often
not easily replaced.

The base rate was lifted by 50 basis points
to 5.0% in June and market expectations
are for a peak of over 6% by early 2024. We
doubt that policy can be tightened that muchwithout the economy buckling and look for alower peak. Holders of popular two-year fixedrate mortgages already face the prospect ofrefinancing from rates just over 1% in 2021 tonear 6% currently.
A hawkish BOE should continue to support
the British pound. Large-cap UK equities offer
good value but could face headwinds dueto their relatively large exposure to health,financials and consumer staples and small
exposure to technology firms. UK gilts appear
attractive with the 10-year yield at 4.4%.

The persistence of inflation has forced the
Bank of England back to a hawkish stance.

United States
We are negative on the U.S. economic outlook. growth to win its fight against inflation. The
Restrictive monetary policy and weak leading downgrade cycle in S&P 500 consensus
economic indicators point to a slowdown. The earnings estimates bottomed out in April asstronger big bank results and mega cap tech
Fed is nearing its peak for the federal funds
fundamentals stabilised on cost cutting andrate after hiking by 5 percentage points over
expected artificial intelligence tailwinds.
the past 14 months. Policy is restrictive, the
FOMC (Federal Open Market Committee)
U.S. earnings growth would likely fall 10 tomembers are cognisant of the lags until the
15% in a recession, creating downside risk
full impact of their past moves are felt, banks
to equity prices and Treasury yields as theare tightening credit standards, and the Fed
Fed eventually lowers interest rates more
staff is forecasting a recession.
aggressively than currently priced. Market
psychology is optimistic – but not euphoric.
It is possible that Chair Jerome Powell could
Our outlook for U.S. equity markets isstill hike one or two more times this year.
cautious due to expensive valuations andHe has repeatedly emphasised that letting
a deteriorating business cycle. However,inflation become entrenched would be awithout evidence that investors have become
bigger mistake than overtightening andfully euphoric, markets could potentially still
causing a recession. The Fed creates risk
melt higher in the near-term.
for markets when it is emphasising highinterest rates and seeking weaker economic

8 /2023 Global Market Outlook – Q3 update / Russell Investments

Eurozone
After escaping recession over the winter, theoutlook is turning more negative. Technically,
it can be argued that the recession has
already arrived, given that GDP growth wasreported as negative in both Q4 2022 andQ1 2023. The labour market remains tight,
with unemployment the lowest since the euro
was established and the growth of wages
accelerating.
The ECB does not think the region is inrecession, as it lifted the deposit rate to 3.5%
in June and signalled that another hike islikely in July. President Christine Lagarde
has a constructive view on the outlook. Our
take is that the eurozone economy is startingto buckle under the strain of the monetary
tightening so far. Lending growth has
collapsed, and the credit impulse is the mostnegative since the 2007-08 financial crisis.
We also think that headline and core inflation
are set to decline rapidly in coming months.

Energy prices have an outsized impact on
European inflation, and the energy Consumer
Price Index (CPI) has fallen 1.8% over the
past 12 months after surging 44% in the year
to March 2022.
The fading recovery in China is anotherchallenge for the eurozone. China is an
important export market for the region’s
industrial and luxury goods.
Near term, the continued hawkishness of the
ECB is supportive for the euro, which is stillcheap on a purchasing-power parity basis.
However, the risk of a policy mistake by the
ECB could put downward pressure on thecurrency over the medium-term. Eurozone
equities have performed broadly in line with
U.S. equities so far this year, but will soon
face the cycle challenges of tight monetary
policy and recession risk.

Japan
Domestic spending in Japan is starting to pickup, with the reopening gathering some steam
and inbound tourism returning. Wage growthcontinues to edge higher, and the stickier
parts of inflation (i.e., services inflation) is
approaching the Bank of Japan’s 2% inflation
target. The trade balance with the rest of theworld is also improving, in part due to thedecline in the oil price (Japan being a net oil
importer), which should eventually reduce

the pressure on the Japanese yen. We expectthat the Bank of Japan will amend its yieldcurve control program by the end of the year,
either by increasing the band around the
10-year target or changing the target tenure
to a shorter date. These dynamics should see
a strengthening of the Japanese yen. The yenshould benefit if global equity markets turndown and we enter a risk-off environment
through the rest of the year.

Russell Investments / 2023 Global Market Outlook – Q3 update/ 9

ChinaThe Chinese economy is decelerating after astrong first quarter. Consumption remains the
key focus this year, and the data continues toindicate the Chinese consumer is cautious.
The excess savings in China are lower than in
the developed world and are less likely to be
spent, given these savings were accumulated
without the support of fiscal stimulus.
Chinese property developers continue to seeelevated credit spreads, and the recovery
in the property market has been slow.
There has been a bit of additional stimulus
provided for electric vehicles, and we expect
there will be more stimulus before the year
ends (particularly for the property sector).

Monetary policy is likely to remain very
accommodative, given inflation in China iscurrently running below 1% year-on-year.
We maintain our view that 2023 GDP growthis likely to be around 5%. The Chinese yuan
is unlikely to strengthen until we see signs
that the Federal Reserve and other developed
central banks are close to cutting interest
rates. Chinese equities look relatively cheapand have given back a significant amountof the gains since the government liftedpandemic restrictions.

CanadaA historic surge in immigration has supported mounting. Meanwhile, the labour market isloosening. The Canadian economy lost jobs
consumption and overall economic growthin May, the first time since August 2022,
and played a crucial role in stabilisingand job vacancies have declined. Weakening
housing. This helped prompt the Bank of
employment trends will eventually weigh on
Canada (BoC) to hike its target rate in June
housing and consumer behaviour and put
after being on a conditional pause for mostdownward pressure on inflation. We think aof the year. Market probabilities indicate
recession is the likely outcome over the nextthat one more rate hike is possible, raising
the target rate to 5.0%, double its estimated 12 months. However, the BoC may be patient,and wait for confirmation that the economy
neutral rate of 2.5%. A 5% policy rate isis no longer operating in excess demand andvery restrictive, and despite recent housingthat inflation is trending lower sustainably
developments, households are vulnerable
before easing monetary policy.
if rates stay elevated. Insolvencies, credit
card balances, and usage of home equity
lines are rising. These indicate that stress is

10 /2023 Global Market Outlook – Q3 update / Russell Investments

Australia and New Zealand
The Australian economy continues to slow,
but the probability of a recession remains
lower than for countries in the Northern
Hemisphere. Immigration levels are high,which will support economic activity.
However, the increase in interest rates andthe expiration of many fixed-rate mortgages
over the last three months will further slow
household spending. The labour market isvery tight but should ease through this year as
forward-looking indicators of labour demand
are softening and labour supply is increasing.
The Reserve Bank of Australia has indicatedthat further interest rate increases may berequired, given concerns about sticky inflationand very weak productivity (which increases
unit labour costs). We think the Australian
dollar has upside given our expectationsof better economic growth and narrowinginterest rate differentials.

New Zealand will experience a significant
tightening of household finances, as many
fixed-rate mortgages reset to much higher
rates following the Reserve Bank of New
Zealand’s (RBNZ) aggressive tightening. We
think that recession risk in New Zealand ishigher than for Australia. The recent budget
provides some support, with the fiscal impulse
for 2024 larger than most economists had
expected. Similarly, a pick-up in net migrationis helpful, although it is a smaller impulse
relative to Australia. After lifting rates by morethan most developed central banks, the RBNZ
has pulled back its guidance on the need for
future rate hikes. We expect its hiking cycle is
now over.
Another consideration is the general election
in October. Opinion polls have tightened at
mid-year, and the incumbent Labour party has
regained the lead.

Eurozone equities will soon face the cycle challenges of tightmonetary policy and recession risk.
Andrew Pease

Russell Investments / 2023 Global Market Outlook – Q3 update/ 11

ASSET-CLASS PREFERENCES
The gradual and uneven slowdown in the United States creates a complicatedenvironment for financial markets. Our cycle, value and sentiment framework is
cautious on the one-year ahead outlook for the S&P 500. Valuation is expensive
and the cycle is a headwind based on our view of recession risks. Our proprietarysentiment index is now slightly overbought after being oversold at the beginningof the year. Markets, however, could melt upward over the next few months
if investors begin to speculate (wrongly, in our view) that the resilience in theeconomic data suggests that a recession might be avoided.
Another complicating factor is the growing enthusiasm forstocks linked to artificial intelligence (AI). Almost all the
S&P 500 gains so far this year have been delivered by stocks
linked to AI. This narrow leadership creates a risk that thegains could be quickly unwound if recession fears prick the AI
hype. But there is also the possibility that investor appetite for
AI-themed vehicles offsets cycle headwinds. On balance, we
expect the cycle pressures to create downside equity risks, but
AI mania is difficult to predict.

Our CVS framework provides us with a positive outlook for
U.S. government bonds. 10-year yields near 3.8% are goodvalue, recession risks provide cycle support and contrarian
sentiment is also supportive with futures data showing thatmost speculative investors are positioned for yields to risefurther. Bonds provide strong diversification potential for
portfolios.

CHART 4: Sentiment Chart
Composite contrarian indicator: investor sentiment appears directionally overbought, but
not yet euphoric

Oversold432
1Overbought

0
-1
-2
-3
2018

2019

2020

2021

2022

2023

Source:Investments.
Last
observationis -1.23
Standard
Deviations,
as ofJuneThe2023.
The Composite
Source: Russell
Russell Investments.
Last
observationis -1.23
Standard
Deviations,as of June
14,14
2023.
Composite
Contrarian
Indicator forIndicator
investor sentimentis measured
in isstandard
deviations
above orbelow a neutral
Positivenumericlevel.
scoresContrarian
for investor
sentiment
measuredin standard
deviations
abovelevel.
or belowa neutralcorrespondto signs
of investor
pessimism,
whileofnegativenumeric
scores while
correspondto signs
of investor
optimism.
Positivenumeric
scorescorrespondto signs
investorpessimism,
negativenumeric
scorescorrespond tosigns of investor optimism.

12 /2023 Global Market Outlook – Q3 update / Russell Investments

Specifically, we have the following assessments at mid-year 2023:
Equities have limited upside with recession risk on the horizon. Although non-U.S. developed
equities are cheaper than U.S. equities, we have a neutral preference until the Fed become lesshawkish and the U.S. dollar weakens significantly.
Within equities, we prefer the quality factor, which tracks stocks that have low debt and stableearnings growth. These stocks typically show good relative performance during periods of economic
slowdown. Quality stocks are relatively cheap at mid-year compared to the rest of the market.

Emerging market (EM) equities have underperformed developed markets so far this year. This has
been despite the weaker U.S. dollar, which usually is a trigger for EM to outperform. Concerns about
China’s economy have been a headwind, and these worries seem unlikely to lift over the near-term.
For now, a neutral stance is warranted.

High yield spreads are below their long-term average and investment grade credit spreads are close
to their long-term averages. The poor cycle outlook is a challenge with default rates rising as U.S.
recession probabilities increase.

Government bond valuations look increasingly attractive. U.S., UK and German bonds offer
reasonable value. Japanese bonds, however, are still expensive with the Bank of Japan holding to
the 50-basis point yield limit. It is likely that the U.S. yield curve can steepen in coming months.
The spread between 2-year and 10-year bond yields is close to an extreme. The yield curve tends tosteepen after the Fed has completed raising interest rates and markets start looking toward monetaryeasing.
Real assets: REITs (real-estate investment trusts) continue to have more attractive valuations relative
to infrastructure and global equities. REITs should perform well when interest rates fall, given that
real estate fundamentals appear reasonably healthy. Commodities face headwinds from the lacklustre
Chinese economy, particularly the poor outlook for infrastructure and construction activity. Oilprices have failed to rise following successive announcements of supply cuts by petroleum-exporting
countries, and prices are unlikely to recover as global growth continues to slow. The supports for gold
prices are unwinding as inflation declines and real interest rates increase.
The U.S. dollar (USD) has trended lower over the past month as investors speculate the Fed is nearing
the end of rate hikes. It could weaken further if markets become confident that a recession can be
avoided, given the counter-cyclical nature of the dollar. The Japanese yen is attractive from a cycle,
value, and sentiment perspective. At 142 versus the USD, it is significantly undervalued relative to its
purchasing power parity valuation of 92. Japanese inflation pressures mean the Bank of Japan is set toeventually move away from its yield curve control monetary policy. Positioning data show that many
investors expect further yen weakness.

Russell Investments / 2023 Global Market Outlook – Q3 update/ 13

Asset performance since the beginning of 2023

NASDAQ ($)
MSCI World Growth (L)Japan Topix (¥)
MSCI EMU(€)
S&P 500 ($)
MSCI All Country World ($)
MSCI Emerging Equities ($)
Gold ($)
Russell 2000 ($)
Global High Yield Bonds ($)
ASX 200 (A$)
Global Listed Infrastructure ($)
FTSE 100 (£)
S&P/TSX (C$)
MSCI World Value (L)Global Corporate Bonds ($)
Bloomberg Global Treasury hedged ($)
Global REITS ($)
U.S. 10-year Govt Bond ($)
MSCI China ($)
U.S. Dollar Index DXY ($)
Bloomberg Commodities Index ($)

31.4
26.4
23.2
16.3
15.8
14.5
9.0
7.9
7.3
5.5
5.0
5.0
4.7
4.6
4.2
3.4
3.0
2.7
2.5
1.4
-1.2
-4.7

0%

10%

20%

30%

Source:Refinitiv
Refinitiv®
DataStream®,
asJune
of 16
June
2023.
EMU
= European
Economicand Monetary
Union.
®
®
Source:DataStream, as of
16,
2023.
EMU
= European
Economicand Monetary
Union.

Bonds provide strong diversification potential for portfolios.
Andrew Pease

14 /2023 Global Market Outlook – Q3 update / Russell Investments

IMPORTANT INFORMATION

The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are
current as of 26 June 2023. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. Please
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2023 Global Market Outlook

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