Cash should be investors' top pick in 2023, but bonds are smarter than equities for investors, Barclays said. Ajay Rajadhyaksha, global chair of research, said the ability to earn 4% or more with basically no risk will "drag" on both stocks and bond markets next year. But he said he'd play bonds if he had to pick one or the other. "If forced to choose between stocks and bonds, we would be overweight core fixed income over equities," Rajadhyaksha said in a note to clients. "But cash should be the real winner of 2023, with US front-end yields likely to go to 4.5% or higher and stay there for several quarters." Why bonds over equities? Rajadhyaksha continues to expect that the Federal Reserve's focus will be on cooling inflation to a target 2% through interest rate hikes and that will keep long-end yields anchored despite the current risk priced into them. "The macro backdrop entering 2023 looks decidedly negative," he said. "The world is set for one of its weakest years of growth in decades. And unlike in past recessions, monetary policy will remain restrictive even in the throes of the coming downturn." Rajadhyaksha said it's an "optical illusion" to not view a 4% yield on the 10-year Treasury as high when comparing it to history. That's because the 10-year yield growth shows that capital losses are high, whereas the S & P 500's performance this year looks relatively more neutral. For equities, the S & P 500 's performance shows there is still a downside coming, with Barclays forecasting a bottom in the first half of 2023. Last week's rally doesn't change that expectation. Instead, it reinforces that investors are fixated on when the Fed will slow rate hikes, Rajadhyaksha said. He cautioned that they should remember the central bank typically stops raising rates before a recession occurs. The drop of 16.3% within the S & P 500 shows the index is only about halfway to the range of 30% and 35% down – which in this case would be at around 3,200 points – from where he said it usually hits before rebounding. The continued bond sell-off, compression of stock multiples and another season of less-than-positive earnings reports will drive down the equities market in the fourth quarter, he said. On the other hand, Rajadhyaksha said bond yields have responded more meaningfully thus far to the Fed's hikes, which makes him less concerned of a big drop to yields beyond what investors are already anticipating. He said long-term core bonds have relatively low downside because they have already felt the brunt of the tightening economy, whereas equities have a farther way to go. Bonds could see a significant upside if the soft economic landing hardens, he said. Still, he said the comparatively lower risk of holding cash makes both less enticing. Meanwhile, he said neither U.S. credit or the dollar look particularly attractive in 2023. "The fed funds rate is headed over 4.5%, so cash is a low-risk alternative that should drag on financial market valuations," he said.