With the cost-of-living crisis and a strained macroeconomic climate likely to persist through 2023, it’s little wonder that investors are reviewing their portfolios and considering potential adjustments.

According to the Bank of America’s fund manager survey for December (which quizzed investors with £650 billion under management collectively), 27% of respondents revealed that government bonds would be the most rewarding asset classes this year.

This followed a surge in bond investment in November last year, when funded data group Calastone reported £1 billion worth of inflows into fixed-income funds in the UK. Allocation to bonds also rose in December, with respondents saying that they were 10% overweight during this period (for the first time since April 2009).

But why are government bonds so attractive in 2023, and what other asset classes are worthy of consideration this year?

The appeal of bonds in the current macroeconomic climate

The rise of government bonds should come as no surprise in the current macroeconomic climate, which is defined by double-digit inflation and soaring interest rates.

The Bank of England (BoE) has initiated a number of proactive base rate hikes since December 2021, as part of wider quantitative easing measures aimed at dragging inflation back towards the bank’s nominal target of 2%.

There’s a sense that this strategy is starting to deliver gradual but incremental effects, with inflation having fallen by three consecutive months through January 2023 and reaching 10.1%. The base interest rate in the UK was subsequently hiked by 0.5 percentage points to 4% at the beginning of February, although this may represent its peak if inflation continues to fall.

Regardless, the base rate will remain at 4% for the foreseeable future at least, with this translating into higher yields and returns for banks in the short-term.

These increased yields are continuing to draw investors back towards government-backed bonds, which also offer a tangible store of secure wealth in an uncertain economic climate. Even if the forecasts are correct and the interest rate is cut towards the end of the year, this will serve to stimulate the economy and deliver further expectation of capital gains.

This reasoning has also encouraged investors to increase their stake in corporate bonds, with 24% of respondents to the Bank of America’s fund manager survey also highlighting this asset as potentially lucrative in 2023.

What about equities and commodities?

A further 25% of respondents also talked up equity and shares as the best investments in 2023, with this offering access to a broad and diverse asset class that holds tangible value in almost any set of market conditions.

The key is to consider the right strategy in 2023, against the backdrop of an uncertain economic climate and the lingering threat of recession. This type of climate usually drives investors to seek out discounted stocks, which have been impacted adversely by previous economic events and seen their prices plummet ahead of an inevitable collection.

Instead, Wall Street strategists are encouraging investors to target consistent and high-quality shares, such as Amazon and Coca-Cola. This emphasis on quality will help you to target businesses with consistent earnings and tangible profits, enabling you to bank reliable dividends in the short and medium-term.

If such stocks remain outside of your budget, consider buying fractional shares that enable you to invest within your means while still accessing consistent returns. You can learn more about how to buy shares in the current climate too, with this offering crucial insight and context across the board.

Another viable strategy may well be to target value-oriented stocks and small-cap shares, which are known to offer longer-term gains and continue to outperform growth alternatives.

Through 2023 so far, value has outperformed growth investing on a significant scale, delivering a 4.1% return compared to just 3.8%. This trend is expected to continue indefinitely (which is standard for such cycles), so it’s worth sticking with value for the time being.

A further 12% of the survey’s respondents suggested that they’d be increasing their allocation in commodities in 2023, with this asset class also renowned for its diversity and potential to serve as a hedge against inflation.

Remember, even if Prime Minister Rishi Sunak achieves his objective of halving inflation to around 5% by the end of 2023, this will remain more than double the central bank’s target of 2% and will need to be factored into your investment choices.

But which commodities offer the best value this year? Well, precious metals such as gold are arguably the best hedge against inflation, while this asset tends to see its value increase during times of economic contraction. This also provides a secure and reliable store of wealth, which typically sees the demand for gold soar as the economic climate worsens.

If the economic climate does improve in line with falling inflation towards the end of 2023, you could also consider materials such as silver. This is a more industrial metal, and will therefore likely see its value increase as growth returns and demand starts to increase.

Despite being more volatile and heavily impacted by the war in Ukraine (which has curbed supply), this offers an opportunity for speculative investors and those with a healthy appetite for risk.