The recent banking troubles in the U.S. will have reverberations in global markets and the global economic outlook. It’s too early to know the magnitude of the economic impact as the authorities are working to manage possible contagion. This event puts the International Monetary Fund ‘s (IMF) recently revised 2023 global economic growth outlook of 2.9% at risk.
While the European banking system is connected to the U.S., the smaller regional banks in Europe are more diversified than their U.S peers. Elsewhere in Europe, fears of natural gas shortages resulting in cascading manufacturing bottlenecks have subsided significantly. In the coming summer, Europe will again be forced to fill its gas storage as much as possible, this time with much less gas from Russia, as well as potentially having to compete with China’s renewed energy demand.
Despite the milder weather, global markets are dealing with a relatively hawkish European Central Bank, due to stubborn inflation in Europe. We still expect that these uncertainties could tip European economies into recession.
While we recently reduced the magnitude of our underweight in recognition that the risks of a sudden manufacturing stop have receded, we remain underweight the international developed markets (IDM).
In China, at the National People’s Congress (NPC), the outgoing Premier Li Keqiang set a 5% economic growth rate for 2023. The NPC also unanimously confirmed President Xi Jinping’s third presidential term, and Li Qiangreplaced Li Keqiang as the Premier of the country. The newly appointed central bank governors and securities regulator signify a tighter grip of central decision making.
We remain underweight emerging markets assets. Consensus assumes that China could deliver 5.1% growth rates in 2023 with the help of reopening efforts. We expect a lower growth rate unless China unleashes fiscal and monetary stimulus.
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Global equity – International developed markets remain less attractive but are improving Emerging markets are less attractive. Global fixed income – International developed markets – hedged are less attractive Global fixed income – 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