Us stocks have risen since mid-October, driven by cooling inflation and a shift in Fed policy expectations, the Hong Kong-based Wande news agency reported. However, Fidelity International said that the current US stock prices still do not reflect the prospect of raising interest rates and its impact, and investors need to be defensive in asset allocation in 2023, increasing their holdings in emerging and Asian markets.

Specifically, Fidelity said in its 2023 outlook that the market wanted to believe that central banks would change direction to achieve a soft landing for developed market economies. But Fidelity believes that the US economy still faces uncertainty in 2023. The Fed's previous norm of "whatever it takes" intervention during 2020 is disappearing.

Fidelity believes that before the market fully digests this, we may see a sharp rebound in the context of expected Fed action, but when it does not happen in the way expected, the market will reverse. Interest rates should eventually level off, but if inflation stays above 2 per cent, they are unlikely to fall quickly, even if the Fed takes other steps to maintain liquidity and manage the increasingly challenging debt burden.

A key factor to watch is where the dollar will go. In 2022, a strong dollar proved to be a blow to other economies, including developed countries and emerging countries that rely on hard currency debt. If the Fed continues to raise interest rates, a stronger dollar could accelerate uncertainty elsewhere. On the contrary, a significant change in the direction of the dollar is likely to bring broad relief and increase overall liquidity in the challenged economies.

Fidelity says the rest of the world is on a different trajectory. So far, Japan has maintained a loose policy setting. But giving up control of the current exchange rate curve could have unintended consequences for the yen and could add another layer of risk to the already rising level of volatility in the foreign exchange market.

In terms of specific asset allocation, the report shows that emerging markets and Asian countries have a weak correlation with growth in the US and Europe, providing a way to increase diversification, while cash and high-quality investment-grade securities provide defensive features.

Fidelity believes that defensive positions will still be important for investors until 2023. Until volatility recedes, cash and unrelated assets will be key components of multiple portfolios. Government bonds are also likely to work, especially now that yields have become more attractive. The structural positive factors that have driven bond gains over the past 40 years may have diminished, but government bonds remain the preferred asset to diversify their portfolios during the recession.

It is worth noting that while Fidelity believes the time will come to reallocate stocks, for now, investors should increase defensive allocation in the deteriorating US stock market environment until volatility subsides. Fidelity's economic outlook for 2023 is not reflected in earnings forecasts or valuations, which means the market is likely to fall further. Compared with history, risky assets are still a long way from "cheap" valuations.

Fidelity believes that diversified investors must use tools as widely as possible in 2023 and beyond. From absolute return strategies to alternative investments (including infrastructure and renewable energy) to private assets (including private equity, private credit and real estate), less relevant exposures will be an important part of investment vehicles. In fact, asset allocation in the next few years will require wider diversification and sources of risk, and investors will be forced to look beyond traditional assets to achieve long-term returns.