In our Year Ahead outlook, “A Year of Discovery,” pub­lished in November 2021, we said that the process of dis­covery of a new balance between supply and demand across multiple markets would create uncertainty that investors would need to navigate.

More than 10 months on, that process continues to create volatility and uncer­tainty.

But there are some reasons to be hopeful, particularly for investors with longer-term time horizons. The US labor market remains strong, mitigating fears of a near-term recession. Inflation expectations have fallen, sug­gesting that conviction remains high that prices will come under control. Significantly, too, for investors looking to allocate for the longer term, valuations across equities and bonds are much more favorable now than they were as we entered 2022. Our base case is that equity markets will take a bumpy road higher by June 2023.

On balance, we think this is an environment to be invested and diversified, but also be selective. This is not an environ­ment to be positioned too heavily for any given short-term scenario, but it is one in which we believe smart reallocations within asset classes can improve the risk-return profile of overall portfolios to become more resilient. Five broad themes characterize our market preferences: defensives, income, value, diversity, and security.

First, to manage portfolio risks, we think investors should tilt toward relativelydefensiveparts of each asset class. Within equities, this means boosting allocations to health­care and consumer staples, relative to consumer discretion­ary. Within fixed income, we prefer high-quality bonds and resilient credits, whereas we are more cautious on the out­look for cyclical credit and pockets of high yield. And within currencies, we continue to expect appreciation for the US dollar and see the Swiss franc, another safe haven, as our preferred currencies. Investors can also consider capital protection strategies.

Second, to maintain a steady flow of capital amid uncertainty, we advise investors to seekincomeopportunities across asset classes including quality income stocks, select short-duration bonds, and direct real estate and lending. Investors can also consider volatility-selling opportunities in foreign exchange and commodities to improve portfolio yields.

Third, we continue to believe this environment of elevated uncertainty and rising interest rates will favorvaluestocks—those with relatively low valuations backed by proven near-term profits—rather than more highly valued growth stocks that are more reliant on future earnings pro­jections. The UK market has a relatively high concentration of value sectors, and we also continue to like global energy stocks—another value sector—which should be further supported if tight commodity supplies lead to higher prices, as we expect.

Fourth, with equity and bond markets both still heavily driven by central bank policy expectations, we think inves­tors shoulddiversifyinto alternatives, including hedge funds and private markets, to diversify portfolio correlations and mitigate volatility. Within hedge funds, we prefer dis­cretionary macro, fixed income relative value, and low net equity long/short strategies, as well as multi-strategy funds, all of which should be well suited to navigating volatile and range-bound markets. We also recommend finding value in private markets in secondaries, distressed/restructuring debt, and value-oriented buyouts.

Finally, while we retain a least preferred stance on growth stocks, the era of security and the global transition toward stability and sustainability continue to generate attractive long-term opportunities, in our view.

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Our outlook