How will global equities and the economy fare this year?

The first three weeks of 2023 have washed off some of the bloodbath that global equities witnessed in the past year, when almost all markets ended in the red. The benchmark S&P500 index on the New York Stock Exchange, which ended almost 20 per cent last year, ended its best week in two months last week, and gains continued this week as well.

So what are the signs?

The main driver has been the latest US inflation data, that marks a continuous slowing down of prices that has been the scourge of the equity markets over 2022. Along with this, the initial results from the earnings season have indicated that the companies are holding up well against the central banks’ hawkish stance of high interest rates, which has been necessitated to reduce inflation. A mild winter in Europe has also helped the stock markets in the continent keep their cool, as moderate energy prices have helped keep price rises in check.

However, the conflict in Ukraine, the resurgence of Covid-19 in China, and the continued hawkish stance of the central banks continue to cast a cloud over the equity markets this year, with the possibility of a recession looming large.

So how will it be in 2023?

A number of top global financial institutions have published their thoughts on how the markets will fare this year. Khaleej Times looks at some of their forecasts.

Goldman Sachs

According to US investment bank Goldman Sachs, the US should avoid a recession. According to the bank’s research, core personal consumption expenditure (PCE) inflation is expected to slow from 5 per cent now to 3 per cent in late 2023, with only a 0.5 per cent change to the unemployment rate. To tame real income growth, the Fed is likely hike another 125 basis to a peak of 5-5.25 per cent with no rate cuts expected this year, report from Simply Wall Street said.

Real disposable income recovered towards the end of last year from the lows of the first half of 2022 where the initial rate increases were a sudden shock to household budgets.

Now that things are cooling-off on the US job market, Goldman Sachs predicts that employment levels will normalise and openings fall to levels that will slow wage growth enough to meet inflation targets.

JP Morgan

JP Morgan has assumed a slightly more pessimistic position than Goldman Sachs, anticipating that more developed countries will slip into a recession, however their commentary echoes their belief in this recession being somewhat subdued, Simply Wall Street said in a report.

The stock market sell-off has left some stocks with strong earnings potential trading at very low valuations.

If inflation begins to tame itself in 2023, central banks will stop raising rates, and recessions, where they occur, it is likely to be modest. JP Morgan has identified possible signs that inflationary pressures are moderating and will continue to do so throughout 2023.

Turning to the equity market. The risk vs reward is in a more favourable position compared to 2022 given that the market should’ve priced in the worst case scenarios at this point. So while a bottom may still be yet to come, JP Morgan is of the opinion that we aren’t too far from it.

Morgan Stanley

The first quarter of 2023 has the ingredients to build on strengths of the fourth quarter of 2022 but an inverted yield curve hints at a potential economic slowdown at some point in the year ahead, according to Morgan Stanley research.

The bank believes that early in 2023, earnings will collapse, bringing the stock market down with them. But sectoral leadership from the financials, industrials and materials sectors suggest otherwise.

The economy is proving too resilient, causing the “looming collapse” in earnings to remain elusive for yet another quarter. Earnings are expected to drip down slowly, frustrating market bears. With continuing improvements on the inflation front mixed in, you have the ingredients for a strong first quarter.

Morgan Stanley’s Head of Applied Equity Advisers, Andrew Slimmon, asserts that consensus for the early stages of 2023 will be underpinned by an earnings collapse. As the impacts of rising costs, rising interest rates, supply chain disruptions and a diminished household disposable income wash through the quarterly earnings reports, the market is expected to drop accordingly.

Credit Suisse

Credit Suisse forecasts that the UK and the Eurozone will slip into a recession this year, while China will grow slowly These economies should see the worst by mid-2023 and begin a slow recovery provided that the US escapes a recession. Tightening monetary conditions will keep economic growth low throughout 2023.

Inflation is expected to decline in 2023, but will remain above central bank targets.

2023 will be a ‘tale of two halves’ as interest rate rises remain a concern for the first half of 2023, the stock market performance should be quite restrained and sectors with stable earnings and low debts should fare better. Once central banks shift from increasing rates, growth stocks should receive a kick in the second half of the year.

Fears of a global recession is likely to keep the US dollar strong in the early stages of 2023. Once monetary policy becomes less aggressive and foreign growth risk subsides, the dollar will naturally fall back and stabilise.

Credit Suisse’s outlook echoes the same comments as the others. The Eurozone and UK will likely slip into a moderate recession while the US should manage to escape.

Interestingly, Credit Suisse has asserted that the changing geopolitical landscape is presenting a unique situation for investors to tackle. The West, East and the South have become quite polarised in terms of monetary policy and political views.

Strained geopolitical relationships and the Covid-19 pandemic have fundamentally altered global trade flows and has shifted the focus for international trade from trying to secure pricing dominance, to now ensuring supply chain resilience and geopolitical relationships are maintained.

• Business