The global economic outlook is stabilizing, with falling energy prices easing concerns of high inflation, supply-related bottlenecks disappearing noticeably, and China’s economy reopening. Even with these tailwinds, according to the latest OECD estimates, the world economy is expected to grow at 2.7% in 2023, much weaker than past standards. The recent banking troubles in the U.S. will continue to have some economic and market reverberations.
We expect central banks in Europe, especially in the U.K., to continue raising policy rates due to stubborn inflation, whereas we believe the Fed’s recent decision to forego a rate hike in the U.S. suggests the Fed wants to end its rate hike campaign. Europe will need to fill its gas storage as much as possible this summer, but this time with much less gas from Russia and potentially having to compete with China’s renewed energy demand. The eurozone is in recession after back-to-back negative quarterly growth rates as Germany’s manufacturing troubles impact its neighboring countries.
We remain underweight the international developed markets (IDM) but recognize the solid momentum in some equity markets, especially in Japan. The diverging rate policies resulting from the declining June U.S. inflation readings could lead to other currencies strengthening for the rest of the year.
We remain underweight emerging markets assets. Tighter global financial conditions and economic mismanagement has led to currency crises in economically vulnerable countries like Turkey, Argentina, Nigeria, and Egypt.
On a positive note, Chinese inflation figures are bucking the global trends, with annual consumer price inflation at 0.2% and producer inflation at -4.6%, the lowest in G20 countries. China’s trade surplus closed at a historic record last year and is on track for another record this year.
However, consensus estimates are overly optimistic about China’s economic outlook for 2023 at 5.5%. We expect a lower growth rate unless China unleashes fiscal and monetary stimulus.
Tactical outlook (3-12 months)
To read the publication in its entirety, including our comprehensive view on what this means for global investors and consumers, please click the button below "Download PDF".
Chart shows Global equity Section: International developed markets remain less attractive but are improving Emerging markets are less attractive. Global fixed income Section: International developed markets – hedged are less attractive International developed markets – unhedged remain less attractive but are improving Emerging markets sovereign – hard currency is less attractive Emerging markets corporates – hard currency is less attractive Emerging markets sovereign – local currency is less attractive
