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Introduction
Reluctantly Bearish
Moving into the second half of 2023, the balance of economic forces still appears tilted against global capital markets. Sticky inflation, central bank tightening, and financial instability all pose clear risks.
Yet, through late May, economies and markets both showed surprising resilience. Growth remained positive in the major economies (Figure 1), and earnings results came in stronger than expected. Key equity markets posted gains.
Growth Has Slowed but Major Economies Are Not in Recession—Yet
(Fig. 1) Growth in real gross domestic product (GDP), year over year
As of March 31, 2023.
Sources: Haver Analytics/U.S. Bureau of Economic Analysis, Statistical Office of the EuropeanCommunities, Cabinet Office of Japan, Japan Ministry of Internal Affairs and Communications,International Monetary Fund.
These results appeared to validate the wisdom of a “reluctantly bearish” approach. Bearish, because the risks are substantial. Reluctant, because excessive pessimism can lead investors to overlook opportunities and miss market recoveries.
It’s an open question whether economies and markets can continue to defy the pessimists in the second half, says Sébastien Page, head of Global Multi‑Asset and chief investment officer (CIO).
Many economic indicators, Page notes, are flashing red. But lingering distortions from the COVID pandemic make it hard to distinguish the signal from the noise—the useful information from the meaningless data points.
The strongest bear argument, Page says, is that the economic impact of 500 basis points (bps) of interest rate hikes by the U.S. Federal Reserve has yet to be fully felt. “Every time the Fed has slammed on the brakes in the past, someone’s head has gone through the windshield,” he warns. “And we’ve already found out that some banks weren’t wearing their seat belts this time.”
Although the banking crisis appears contained, its impact on credit conditions will be felt with a lag, notes Arif Husain, head of International Fixed Income and CIO. Resolution of the political dispute over the U.S. debt ceiling also could squeeze market liquidity in the second half, he says, as the U.S. Treasury rebuilds its depleted cash account at the Fed.
Yet, opportunities can be found in select sectors, including small‑cap stocks and high yield bonds. Cheaper valuations and a weaker U.S. dollar also could make global ex‑U.S. equity markets attractive, says Justin Thomson, head of International Equity and CIO. Positive yield curves could do the same for global ex‑U.S. bond markets, Husain adds.
In an uncertain environment, careful security selection will be critical. “Skilled active management can help investors avoid riskier exposures,” Page argues.
Three themes to watch in the second half of 2023
Arif Husain
Sébastien Page, CFA
Justin Thomson
Each month, our Investment Committee prepare a report revealing the two market themes they are watching, their bull and bear views per region and their latest asset class over and underweights.It has been designed to aid you in your decision making and client conversations.
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