SINGAPORE – Central banks will likely pause their quantitative tightening in 2023, but interest rates will remain higher for longer. The resultant tight credit conditions will impact corporate bottom lines.
While inflation will moderate, tight supply-side conditions and labour shortages will keep prices sticky on the downside.
However, the reopening of China presents huge opportunities for emerging market assets, especially equities.
These were some of the key themes highlighted in the most recent reports by numerous major investment houses.
The likes of JP Morgan, BlackRock, Goldman Sachs, S&P Global, Fidelity International and others reckon that despite Federal Reserve rate hikes, market volatility and the recent turmoil in the banking sector, the outlook for financial markets is generally positive in the medium term.
JP Morgan Private Bank said that a dramatic reset in valuations has created one of the most attractive entry points for stocks and bonds in over a decade.
Markets have powered through all the turmoil that 2023 has thrown at it, JP Morgan said in its April 6 strategy report. Through the first quarter, a diversified portfolio of global stocks and bonds has returned roughly more than 6 per cent. Over the last six months, that portfolio is up an even more impressive 10 per cent.
What is perhaps most encouraging is that stocks and bonds are both doing their jobs. Equities are driving appreciation (MSCI World index up 7.6 per cent), while bonds are providing a stable ballast (global aggregate bonds up 4 per cent).
It added that multi-asset and diversified portfolios are on track to continue outperforming cash and inflation in 2023.
But Blackrock noted that the effects of higher interest rates and tightening financial conditions are hitting the economy, with several indicators flashing red.
A key signal was the crisis among several US regional banks.
Silicon Valley Bank collapsed in March, followed by First Republic Bank, as they were unable to cover a run on their deposits. Their assets, made up primarily of bonds, were trading at substantially lower prices on the market and thus were insufficient to cover the deposits being rapidly yanked out.
A similar crisis at Credit Suisse prompted Swiss regulators to force a takeover by rival UBS.
The abrupt demise of Silicon Valley Bank and Signature Bank, and UBS hasty takeover of Credit Suisse are reminders of banks sensitivity to confidence and liquidity, ratings agency S&P Global warned.
Despite these events, most banks remain well capitalised, the investment houses noted. More On This Topic Global banking woes put spotlight on Chinas regional lenders Markets may not be out of the woods yet after March madness Goldman said the recent bank tumult was a liquidity crisis rather than a systemic weakness in the banking system.
We dont see a repeat of 2008s financial crisis, BlackRock said, but added that the recent bank tumult has reinforced its view that a US recession was on the horizon.
The prevailing tight credit conditions will also hit corporate earnings.
Brokerage giant Charles Schwab said: A key issue over the coming months will be the extent to which recent events cause banks to reduce lending. This in turn would weigh on consumer demand and business investment and therefore accelerate the deterioration in the global economy.
We believe an earnings correction will occur this year, global asset manager Fidelity International said. Corporate profit margins are under pressure, and rising funding costs are also adding risk.
That said, there are opportunities in the market, especially in emerging market Asia assets.
Chinas reopening is a significant boost for equities within Asia. Regional earnings for 2023 remain encouraging versus global markets, Fidelity said. More On This Topic Chinas smaller banks cut deposit rates to ease margin pressure China bets $2.4 trillion of construction will boost economy Goldman Sachs has raised its 2023 China growth forecast to 6 per cent from 5.5 per cent, on a rapid rise in domestic mobility and strong activity data. The investment bank also reckons that emerging market inflation is now past its peak and will decline significantly over the course of 2023.
Likewise, the general consensus for the US is that inflation will fall to between 3 per cent and 4 per cent by the final quarter of 2023, though the Feds key interest rate will likely stay above 4.5 per cent.
That said, S&P Global sees the long shadow of the Russia-Ukraine conflict and even sharper tightening of global financial conditions as key downside risks to growth for emerging markets.
A balanced portfolio of equities and good-quality short-duration bonds will provide the best and most stable returns amid volatile market conditions, concluded these investment houses in their latest reports. More On This Topic Asias relative stability offers opportunities beneath the market volatility End of the bear market? Some experts seem to think so