Global investment perspective 2023: The way ahead

As the year unfolds, emerging economies led by India are expected to grow at 3.9 per cent, with the Middle East, Central Asia and Sub Saharan Africa expected to grow at an average of 3.3 per cent.

The year 2023 has brought in a whole lot of surprises for the markets. It started with heightened anxiety about further market price action and the inflation trajectory.

As the year has progressed, we’ve seen market complacency dominate the overall high inflation rhetoric.

The recent softening in US inflation numbers has supported the expectations of the peak in inflation and the corresponding prime lending rates. Although some might still argue about the over-optimistic frontrunning of the interest rate expectations, the recent data points to a probable softening in the overall global economic activity.

With the disappointment of the much-anticipated China reopening of trade, markets have come to their senses regarding the limits of the hyper-growth fuelled narrative.

The service sector remains bright in the otherwise faltering economic growth outlook. As seen from the chart above, there is a growing disconnect between the two sectors.

While manufacturers across the globe have pointed out persistent price pressures on account of past inflation, service sector firms are somewhat at ease and looking beyond the current high inflation prints.

Factually, wage increases in major developed economies, including US, Germany and Japan, have helped defend against the onslaught of high inflation. The global economy, however, runs a high risk of another round of spike in goods inflation.

The US core inflation numbers are still near the 5 per cent mark and seem stickier. Similar is the case for the EU as well as the UK. The goods inflation spike will further complicate the ongoing market narrative. If history is any guide, goods inflation has typically been closely linked to energy commodity prices.

This is a sign of caution as the current profile of energy prices suggests we are not yet out of the woods to counter the overall inflation threat.

Asset performance in H1 2023

The one central narrative currently in play is the vast disconnect between the prospective economic conditions and the equity market’s performance.

Based on leading economic indicators, we are at the onset of a slowdown. Ironically, markets seem more focused on the anticipated rate cuts amidst a probable slowdown/recessionary cycle. The artificial intelligence (AI)-fuelled rally in US tech stocks is enjoying its momentum trade for now. This has generally propped up the overall equity markets investment sentiment.

Investment outlook for the rest of the year

The latest Germany and Eurozone GDP data saw both economies slipping into technical recession territory. Whether or not the global economies slip into recession, some moderation in overall growth is expected.

In its latest forecasts, IMF now sees the global GDP slipping to the 2.8 per cent range for this year, below the 2022 advance estimates of 3.4 per cent.

Interestingly, advanced economies are likely to lead the overall decline, with the GDP dropping to 1.3 per cent this year, below the 2022 number of 2.7 per cent. Emerging economies led by India are expected to grow at 3.9 per cent. Middle East, Central Asia and Sub Sahara Africa are expected to grow an average of 3.3 per cent for 2023.

Amongst GCC nations, the UAE is expected to be the bright spot over the next 18 months. The nation’s diversification plans and rational changes in the core business and social laws are boosting the nation’s growth prospects to much extent.

Eurozone, too late to start with the interest rate hike cycle, is now eyeing year-end terminal rates at 4 per cent. The UK is the worst affected by the ongoing inflation spike as the central bank is expected to fight a big battle against inflation. For the UK, markets are eyeing 125 basis points plus rate hikes by the year end.

Interest rate trajectory: The latest statements from US Fed Chair Jerome Powell suggest an even higher rise in the US interest rate. This comes even as markets expect the Federal Open Market Committee to hold the current rate longer.

While the Fed has been the most aggressive in raising interest rates, the inflation gauges being tracked by it are still 2x of the current inflation target of 2 per cent.

Major emerging market economies India and China are sitting in a comfortable position with the overall downtrend in inflationary trends. China, in fact, just announced a cut to its base prime lending rates in June.

Investments: Expected asset price performance

US tech likely to hold onto the momentum led by AI boom: Investors have already frontloaded the rise of AI and the peak in US interest and inflation rates. This has come in the form of sky-high valuations in the top mega-cap names. We could see some profit booking in these names with the valuations so high. However, the price correction, should it happen, could be short-lived.

The hunt for excess returns post-Covid era has become a new norm. Legacy names in this category, including cryptos and tech, will garner much of the market attention.

US and EU long-term bond futures could ride the wave of dovish hold: The short-term interest rates in the US and EU remain elevated, thereby pressuring the long end of the curve.

With inversion now the new norm, watch out for a complete dovish hold by US and EU. Should this event coincide with a US recession, demand for long-duration bonds could likely increase.

Gold and energy

Gold rates have undergone a correction from its triple-top resistance zone of $2,050 – $2,100.

The ongoing bearish consolidation pattern in the precious metal suggests a further downside play. Much of the euphoria surrounding the previous gold rally has evaporated. Two major tailwind factors, including physical central bank buying and upside consolidation in the euro, have lost much of their impact on gold prices.

This piece has been authored by Vijay Valecha, chief investment officer at Century Financial.