Pivot Powell to China’s comeback: 4 global themes that will define investing in 2023

Forecasting in the world of investing can, more often than not, be an exercise in futility.

Not many saw Russia’s Vladimir Putin invading Ukraine and the consequent hit to global energy markets. Though many urged the US Federal Reserve Chair Jerome Powell in 2021 to tighten interest rates to tame high inflation, no one saw him doing a Paul Volcker and raising rates by unprecedented four consecutive strokes of 75 basis points each just next year.

Amid the growing geopolitical and macroeconomic uncertainties, investors are looking to form expectations about what 2023 could have in store.

We have compiled four themes from various investment outlook notes issued by global investment banks and fund houses that could define investing in 2023.

1 Winter is yet to come

Though global markets have seen a substantial decline in their values in 2022, some analysts believe that the worst is yet to come for them.

“While cash levels among retail investors are historically elevated and professional investors are moving towards a consensus of a US recession in 2023, we haven’t seen full capitulation in risky assets yet,” Robeco, a Dutch asset management firm, said in a note.

Robeco sees a final capitulation in risky assets such as equities in the first half of 2023 as investors finally price in the full extent of a global slowdown and recessions in the US and Europe.

Talking of winter chill, there are none yet to be felt in India. The country’s stock market is enjoying the spring when most of the global economy is slowing down, and rapidly so. But as Indian stocks reclaim their record highs and valuations become more and more expensive, the case for a sharp drawdown grows.

2 The Fed pivot

The recent rally in global markets from their depths has been driven by one notion only: the Fed pivot.

In layman’s terms, it would be the moment when the US Federal Reserve decides it has done enough to smother inflation and demand, and starts to wonder if the impending recession demands its attention.

Traders are betting that a pivot from Jerome Powell, famous for his about-turn in the winter of 2018, when the Fed reversed its quantitative tightening drive abruptly, could come in March 2023 as the US central bank gets more evidence that inflation is slowing down substantially.

“Given our base-case macro outlook of a modest recession in the US and Europe, and retreating inflation in 2023, we expect the Fed to stop increasing rates early in 2023,” investment bank JP Morgan said in a note.

A pivot, when it comes, is likely to mark the bottom of the bear market in global stocks as it has done during Covid-19 and the Great Financial Crisis.

3 China remontada

Football fans associate a remontada, a Spanish term used to describe a comeback when their team manages a seemingly impossible win.

In the case of China, a remontada would mean the country junking its obsession with the “zero Covid” policy that has battered global supply chains for the past two years and has now stirred up the biggest political unrest in the country since 1989.

Also Read: Indian stocks sitting pretty, but Asia feels the China chill

“While an announcement of a complete end to Covid measures does not look imminent, even a roadmap for gradual easing could provide the catalyst for a strong recovery in Chinese demand,” JP Morgan said.

China’s Covid policy and the consequent slowdown in its economy have become a headache, given its status as the growth engine of the world. If and when, China sheds its stringent curbs, it would trigger a rebound in the global economy as well as capital flows to Asia.

4 The name is Bond…

The end of the nearly 40-year bull market in the US sovereign bond market in 2022 was a moment for history books. Globally, owning government bonds was a sure-shot way of losing money, given the record pace at which central banks raised interest rates to combat inflation.

Analysts at Morgan Stanley, however, believe that 2023 will the “year of the yield” as slowing inflation and US recession would force central banks to reverse course and make bonds great again.

“It’s a good year for ‘income’ investing,” they declared in a note.

At JP Morgan, analysts are more excited about investing in the “boring” bond market than they have been in over a decade.

The year 2023 may bruise the ego of equity bulls as their bond market peers go laughing to the bank, according to forecasts.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.