The Global Investment outlook – What do we see for 2023?

 

What did we highlight last year?

 

This time last year in ‘Catch-22 in 2022’ we highlighted the challenge for central bankers – would they be able to tame the inflation tiger as the global economy emerged from Covid-19 lockdown? In the event, they all proved to be too far behind the curve and even the Bank of Japan had to take action by the end of the year to tackle inflation!

Last year, at this stage, there were two variables – the impact of China’s zero-covid policy on global supply chains and rising tensions between Russia and Ukraine with ramifications for energy prices.

Twelve months on and China has finally abandoned its zero-covid policy, but with lower vaccination rates amongst the elderly it is seeing a surge in hospitalisations and deaths – although this has not been reported officially with just 13 deaths confirmed throughout December! While illness may impact the Chinese economy adversely during the first quarter, the opening up of the economy should be supportive for the global economy and the easing of global supply chains as 2023 progresses.

The war of attrition in Ukraine continues to grind on and has exacerbated the inflation spike seen in 2022, driving up food and energy prices. The lack of trust on either side would suggest a peace deal is a very challenging goal, but some form of resolution to the conflict would be most welcome.

Following the political turmoil of 2022 in the UK, life feels pretty grim with recession, the cost-of-living crisis and ongoing strike action. However, it is worth remembering that the UK stock market is not the UK economy and institutional investors are typically looking forward 12-months ahead. A lot of the current pain being endured has to a greater extent been built into share valuations during 2022. When it comes to investing, ‘It’s always darkest before the dawn.’

 

So, what are the reasons to be cheerful?

 

A peace deal between Russia and Ukraine feels like wishful thinking, but nonetheless is still possible and would be a great relief to everyone.

We are past the peak energy shock from the war in Ukraine, with UK gas futures back to March 2022 levels.

Food prices are likely to remain high, but inflation is heading lower. Estimates vary as to what level it will fall to but it will be significantly lower than it is currently.

China abandoning its zero covid-19 policy will be supportive for the global economy in the longer term and should further ease supply chains which in turn will ease some inflation pressures.

The energy shock from the war in Ukraine will accelerate the shift to renewables creating new investment opportunities.

Central banks were behind the curve on tackling inflation, but some, notably the US Federal Reserve (Fed) have aggressively front-loaded interest rate hikes. The Fed has slowed the pace of hikes and could ‘pivot’ in 2023.

The US Dollar has likely peaked in view of Fed policy, which should help to ease inflationary pressures for the rest of the world.

Recession has been factored into UK share valuations to a greater extent. In the absence of last year’s political turmoil and with Sterling at $1.20, we would expect takeover activity to be supportive of UK equities.

 

So, what are the main challenges and risks?

 

A central bank policy mistake – hiking rates too aggressively, not pausing or cutting soon enough and keeping rates higher for longer so prolonging recession.

China re-opening its economy could drive demand for some commodities and goods creating some inflationary pressure.

Given the size of China’s population there is a risk of another Covid-19 variant developing and spreading globally.

The war in Ukraine might grind on with the risk of an energy crisis in Europe in Winter 2023.

That China invades Taiwan. The real danger is from ‘twitchy trigger finger’ during Chinese incursions into Taiwanese airspace. The potential damage to the global economy from sanctions against China and impact on supply chains would likely be far greater than those on Russia.

More likely, is that China continues to ‘sabre rattle’ against Taiwan while the US and Chinese ‘tech’ war escalates, with further American export controls on chip technology leading to increased trade tensions.

The UK mini-budget mayhem created a seismic LDI pension shock and could have prompted meltdown in the UK gilt market had the Bank of England not taken action. Could there be another potential financial shock out there waiting to happen we don’t know about?

 

2023 -Year of the Rabbit

 

2023 has to be better than 2022… surely?

Central bank interest rate policy and inflation data will continue to be the key drivers of market sentiment in the short term. Inflation is starting to trend lower and investors will be watching data like hawks to second-guess central bank action.

We believe the ‘reasons to be cheerful’ remain supportive of equities for 2023. After an ‘annus horribilis’ for fixed interest, with inflation falling, even bonds and higher- grade investment credit is becoming more interesting.

We should not forget that the very short-term outlook is challenging as reflected generally in company trading updates. However, China exiting lockdown, the easing of global supply chains and a possible Fed ‘pivot’ would all seem to point to a better second half of 2023 and year as a whole.

The Chinese New Year 2023 will be Year of the Rabbit. The sign of the Rabbit is a symbol of longevity, peace and prosperity in Chinese culture. Investors will be hoping both President Xi Jinping and Jerome Powell, Chair of the US Federal Reserve, can both deliver some magic and pull a rabbit from out of the hat.     

Read Last Week’s Alpha Bites – The twelve strikes of Christmas

 

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