By Casey Delport
Over the next year, we expect slower global economic growth to dominate the agenda. A recessionary-like environment can be expected across developed markets (DMs), with more divergence in economic activity for emerging markets (EMs).
Our base case is for softer and more volatile commodity prices. A global shift in monetary policy, to either pause or slow down the pace of interest rate hikes in 2023, will largely remain a function of inflation which is broadly expected to ease — especially towards the latter part of 2023.
We caution that the effects of a global slowdown, combined with a higher interest rate environment, will continue to weigh on financial markets.
As such, investors are probably eyeing 2023 with much trepidation after what turned out to be a rather painful 2022 for bonds and stocks alike.
A bumpy ride appears to be on the cards, not counting any other idiosyncratic events that are yet to make an appearance. While it is always hard to say where surprise events might pop up, below, we highlight ten possible factors/events worth taking note of as we shift into gear for the new year.
1. Global food price pressures will continue to ease.
Food price inflation remains a focal point for investors at the start of 2023, given its impact on inflation and global monetary policy last year. Data released by the United Nations at the end of last week showed that The FAO Food Price Index (FFPI) averaged 132.4 points in December, down 1.9% from its November reading and, importantly, the ninth consecutive monthly decline.
Thus, global food prices ended the year roughly where they started despite several disruptions, from the war in Ukraine to extreme weather.
The prospects for 2023 hinge on beneficial weather to boost strained crop supplies and ease supply chain pressures.
2. US inflation and the Fed will continue to dominate discourse - but to what end?
US inflation appears to have peaked in June 2022, with the consumer price index (CPI) providing a good reason to believe that we are now at the beginning of a downward trend. The goods sector has primarily driven the decline in inflation over recent months, while services prices have unfortunately proven stickier.
The downtrend is welcome news for markets and the US Federal Reserve (Fed), but it does not necessarily mean that we will get back to the Fed’s 2% annual inflation target any time soon.
If historical trends are anything to go by, it could take up to two years for us to get there.
The sequencing of how the Fed reaches its dual mandate (taming inflation and maintaining full employment) is key for capital markets as we move into 2023.
3. A possible shift in Japan’s monetary policy
2023 will likely see a significant shift in Japan’s monetary policy as the Bank of Japan (BoJ) Governor Haruhiko Kuroda leaves office in April, having been regarded as extremely dovish during his decade at the helm.
The market is currently positioned to expect up to 30 bps of rate hikes by the BoJ this year. While that might not sound much compared to other central bank actions we have seen of late, considering that the critical short-term policy rate has not been raised for seventeen years, it could be a big deal across global financial markets.
The question is whether this international lending will be redirected to local markets if domestic returns improve because of higher policy rates. There are already some signs of this in recent data.
Investors should be on their guard for possible market dislocation if and when the tide of monetary policy turns in Japan.
4. A potential rout in the global property sector?
Another area that we highlight as a possible cause of concern for 2023 is some form of financial stress in the global property sector.
It seems evident global property prices will decrease this year amid the restrictive interest rate environment. However, the question remains whether it will be modest and contained or form more of a global rout. Even if there is not a rout, a simultaneous slide in prices across countries could cause difficulties for those holding depreciating assets.
5. Europe has seemingly survived the largely expected energy crises
With Europe currently in the middle of its winter season, the risk to gas supplies is diminishing due to a combination of sound judgement and good luck amid unseasonably warm temperatures. Europe managed to fill its gas tanks over the summer, mainly replacing Russian gas with liquefied natural gas (LNG) from the US.
Unless temperatures turn, Europe looks increasingly likely to make it through this winter without resorting to energy rationing.
6. China to open post-Covid-19, easing global supply chain pressures
After a year of domestic economic volatility and international turmoil, China is expected to focus on economic growth this year, which means the country will further deepen reform and expand opening-up.
In that vein, judging by the Central Economic Work Conference held in Beijing in December and the resultant speeches of Chinese leaders, the top policymakers will focus on economic growth to restore the pre-pandemic high-growth environment.
For the rest of the global economy, normalising the Chinese economy could significantly ease supply chain disruptions. However, a rebound in growth in China could also boost demand for global commodities, thus contributing to inflationary pressures.
7. A year of (potential) political stability
2023 may hopefully prove to be a more stable period in global politics than we have grown used to in recent years.
Barring any snap elections, 2023 will be the first year of the twenty-first century without a general or presidential election in any G7 country (Canada, France, Germany, Italy, Japan, the UK and the US).
Notably, efforts are underway to ease tensions between the US and China. The fact that Russia has been internationally rebuked to the extent it has demonstrates its behaviour has been an outlier within the global political arena.
8. Reluctant trade partners: A slowdown in globalisation?
Several lines were crossed in 2022 concerning the international trade arena, primarily due to Russia’s invasion of Ukraine. As such, 2023 is a year where countries may test new ways to weaponise their economic advantages via trade.
Consider the trade disputes that featured in 2022: the US froze foreign currency reserves held by Russia’s central bank, the use of control of payment systems to restrict Russia’s access to trade and self-sanctioning by some western countries through the expropriation of the assets of wealthy Russian ex-pats.
9. Labour markets will likely soften
While the unemployment rate remains low and job growth is still healthy in the US, demand for labour may now be past its peak. Both the job openings and the quits rates have declined.
Corporate earnings reports also suggest moderating labour demand and subsequent cost pressures. These data points signal the Fed is slowly reaching its desired effect of lower demand for workers.
A stable labour market might allow the US economy to avoid a recession caused by interest rate increases.
10. The SA political economy: President Cyril Ramaphosa survived a deeply fractured ANC in 2022
Many of these divisions and internal institutional weaknesses were displayed at the ANC’s 55th National Conference in December.
However, the outcomes of the top seven and National Executive Committee (NEC) votes provide a far more conducive basis for navigating challenges.
Since 2017, the president has made significant political headway, consolidating his internal authority in the party. This has allowed him to drive critical institutional and governance reforms, offer executive support for fiscal consolidation, and introduce some economic reforms.
Any material improvement in investor sentiment will rely on concrete, lasting reforms that the president and his allies push for in the new year. The most notable signal of intent in this regard will be the next Cabinet reshuffle.
Casey Delport is an Investment Analyst – Fixed Income at the wealth and asset management company, Anchor Capital
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