As we reach the midpoint of 2023, it is a good time to review the investment outlook for the rest of the year. With inflation appearing to have peaked in major economies like the US, attention is turning to the prospects for slowing global growth and the resilience of corporate earnings. Key factors influencing the investment environment include central bank policy, consumer demand, geopolitics, and trends in technology and sustainability. Overall, risks remain elevated but there are nascent signs of stabilization in markets that could provide opportunities. Investment trends to watch include a shift towards value stocks and sectors like energy and commodities. Careful portfolio construction with diversification and quality holdings will be rewarded. There is potential for a cyclical recovery in Chinese assets as the economy reopens. Fixed income yields look more attractive but inflation risks persist. Staying invested and maintaining a long-term perspective will be the right approach for most investors.
Inflation pressures may be past the peak but will remain high
The key questions on inflation center on whether the peak is past and if the trajectory will be a slow descent or a sharp fall. In the US and Europe, headline consumer price inflation appears to have peaked with year on year figures trending down. However, core inflation remains stubbornly high indicating persistent underlying price pressures. The supply-demand imbalance in energy, food and labor markets will likely keep inflation elevated for some time. But falling commodity prices and weakening demand amidst slower growth should contribute to a gradual easing. Central banks will seek to delicately manage the tightening path to avoid recession.
Global growth facing challenges but recession may be avoided
The IMF and other forecasters have warned about slowing global growth as the effects of monetary tightening, the war in Ukraine, and Covid-related disruptions in China take a toll. However, recent data has shown surprising resilience in consumer spending and the labor market in the US and Europe. This indicates the possibility of navigating a soft landing though risks remain high. China’s reopening provides some offset and stabilization in commodity prices eases pressures on other emerging economies. The policy focus is on maintaining demand through fiscal spending while avoiding greater inflationary flare-ups.
Diverging policy paths between the Fed and other central banks
An aggressive Fed is likely to continue hiking interest rates possibly into 2023 to tame inflation. In contrast, the ECB and Bank of England have signaled a more tempered approach given growth risks. The PBoC has cut rates to support the Chinese economy. Yield curve inversion shows concerns of potential overtightening by the Fed which could induce recession. But the Fed has indicated its priority is to restore price stability. Overall monetary policy globally will remain in tightening mode but the pace and peak of hikes may be moderated.
Geopolitics and policy support key variables for China rebound
China’s economy has been depressed by the pandemic and weak property sector. However, with rapid reopening underway since December 2022, a cyclical recovery is anticipated by mid-2023. Policy easing led by PBoC rate cuts should aid this rebound. The key risk factors are any Covid resurgence and global spill-over from the Russia-Ukraine conflict. But China retains substantial fiscal and monetary space to counter any external shocks. Focus will be on restoring job growth and supporting consumption. Exposure to a revitalized Chinese economy looks attractive for global investors.
The investment outlook for 2023 has brightened somewhat but volatility will remain high. Inflation may moderate allowing central banks some flexibility. Recession risks are receding. China’s reopening provides a potential new engine of growth. Value sectors and stocks look well positioned to outperform. But maintaining diversification and taking a selective approach based on fundamentals will be prudent.