PERSPECTIVE3-5 min to read

Webinar: Market update and economic outlook (Q2 2023)

A shallow recession looks likely later in 2023

27/04/2023

Authors

Ahmet Feridun
Deputy Chief Investment Officer
Caspar Rock
Chief Investment Officer
Christopher Lewis
Head of Investment Strategy, Wealth Management

Economic outlook

After a difficult year, global equity markets have started 2023 on a stronger footing. US inflation appears to be cooling, suggesting that the Federal Reserve may not have to raise interest rates much further.

However, leading indicators still suggest that a recession is likely in the US this year. The key question is when this recession will start, how long it will last, and how deep it will be.

Markets are taking a relatively optimistic view and pricing in a shallow recession. There are some reasons to support this view. Both the US labour market and services sector are proving relatively resilient, despite the rate increases we have seen over the past year.

Globally, the faster-than-expected re-opening of the Chinese economy could also lead to an improved outlook for global growth.

A high-speed cycle

Over the past three years, we have seen recession and recovery and are now close to recession again. Normally, an economic cycle takes seven to ten years. This fast-paced cycle requires an active approach to investment.

The good news is that we now see far more opportunities in markets than at the start of 2022.

Bond prices have fallen as yields have risen, leaving valuations at their most attractive level in over a decade. In 2022, bonds and equities fell in tandem. However, this year we expect to see more usual trading patterns re-emerge, with bonds rising as equities fall and vice versa. This means that in addition to offering higher yields, bonds should also do a better job of protecting portfolios in the event of equity market volatility.

We reduced exposure to equities throughout 2022 but are now looking to add back to the asset class. We remain on the sidelines for now, however. Our key concern is expectations for corporate earnings. Analysts continue to forecast a slight rise in earnings in 2023, which appears overly optimistic as we head toward a recession.

We are also considering adding to commodities. The energy transition will drive long-term demand for metals and other commodities. There may be near-term tailwinds from China’s re-opening, given that the country still accounts for the majority of demand in some commodities. We could also see higher commodity prices as a result of any escalation of the conflict in Ukraine.

The outlook for the UK

The UK has been hard hit by all of the challenges facing the global economy at the moment: high inflation, low growth, and supply chain disruption. It also has to fund significant budget and current account deficits.

Sterling has recovered from the lows of last year, but only slightly. We do not anticipate a significant rebound while the UK faces these challenges. Having said this, we do not expect the dollar to strengthen significantly this year either.

Restoring productivity growth is key to the UK’s fortunes but it will take time to make any meaningful gains. Whoever wins the next election will face a challenging in-tray.

There’s one silver lining amid the relatively gloomy outlook for the UK: its small- and medium-sized, listed companies are very attractively valued. If the country’s economic prospects do improve, there is significant scope for recovery.

Important information

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Authors

Ahmet Feridun
Deputy Chief Investment Officer
Caspar Rock
Chief Investment Officer
Christopher Lewis
Head of Investment Strategy, Wealth Management

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