2023 Outlook

for what it is worth, 2023 market outlook

Inflation likely to ease in the United States

The principal preoccupation of the investment community as I write is whether the aggressive interest rate hikes experienced last year, a global phenomenon led by the Fed, have effectively caused a recession in their attempt to quell inflation. Our assessment of the inflation trajectory in the leading economy (United States) is that inflationary pressure is beginning to moderate and therefore in due course the Fed will be able to either slow the pace of rate rises or, should poorer economic data require it, cut interest rates. Both would be welcomed by markets.

There is sufficient evidence to conclude that a recession is probably going to be avoided in the first half of 2023. In general, the US consumer, the mainstay of the global economy, is still in relatively good health. Savings deposits in banks amount to trillions of Dollars and whilst the housing market has been battered by higher interest rates, we are not in a 2007-2008 situation where banks were poorly capitalised and mortgage lending was reckless. Furthermore, we have not yet seen significant stress in labour markets reflected in higher unemployment.

Energy price relief and fiscal support for Europe

Looking east across the Atlantic towards the UK and Europe the picture is perhaps less sanguine. Nevertheless, one can still make a case for things being a little better than many believe. Energy prices, particularly those for natural gas have fallen. In addition, medium range weather forecasts, which I am told have improved significantly in their predictive power, are suggesting it will not be a cold winter.

European governments have mobilised significant fiscal support in the face of the energy crisis and when considered together one could argue that any economic disruption may be slight. The conflict between Russian and Ukraine is difficult to comment on, but it seems at least reasonable to believe that a ceasefire is possible. Europe and China have a significant trading relationship, and unlike the US, Europe relies on the Chinese to buy much of its finished goods, be it luxury goods or machine tools.

The Chinese property market and the social contract

China remains a puzzle for most Western observers and the recent abandonment of the CCP’s Zero-Covid policy ought to be seen as a step towards a full resumption of economic activity. COVID19 is rapidly working its way through the urban population and granted this is a cause for concern. Nevertheless, the Omicron variant is the preponderant strain in China. It is highly transmissible but appears to cause less severe symptoms. The Chinese made vaccines are less effective than their Western counterparts, however one study has recently determined that after three doses a meaningful degree of immunity is established.

Global supply chains that are usually heavily dependent on Chinese inputs are likely to be more robust following three years of experience with the pandemic. The property market in China rightly receives attention and it has fallen off a cliff, but it is important to remember that lending standards are generally very stringent, and the authorities stand ready to reinflate the sector by making credit available. This has always happened in China because there is an implicit social contract between the CCP and citizenry the basis of which is the exchange of wealth for fealty. The government seems to have little choice but to prop everything up.

Sentiment is too bearish

Assuming a global economic activity remains positive then company earnings should also be reasonably resilient. Whilst fundamental factors such as this are important, we also pay careful attention to investor sentiment. We like to have some sense of whether there is presently too much optimism or pessimism exhibited by investors. The signals we monitor that are associated with investor sentiment tell us that investors are bearish.

In summary the US consumer continues to spend, interest rate rises should decelerate, China is reopening, and we may see the conflict in the Ukraine end. Not all these things need to happen for there to be a general improvement in market levels. Perhaps 2023 is set up to be a better year for investors.

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