High inflation levels, recessionary risks, uncertainty over central bank policies and geopolitical movements have elevated the complexity of global macroeconomic conditions this year.
In developed markets, there was a “better-than-expected start,” following significant easing in financial conditions, a continued drawdown of excess savings and a rotation of spending from goods to services, according to Sue Trinh, co-head for global macro strategy at Manulife IM.
However, with global growth predictions hovering significantly below the 3% threshold, it appears the case for recession has simply been “postponed, not cancelled”, she cautioned.
“As much as we would like to predict the exact time and place of a recession, the duration of the below-trend GDP growth truly matters. The uneven effects across sectors and geographies further complicate matters,” explained Trinh, speaking at Manulife’s 2023 mid-year outlook briefing on 12 July.
Her comments follow a surge in core inflation levels on the back of strong income growth and economic resilience.
Such price pressures have pressed central banks around the world to extend their tightening cycles, even as they have been more hawkish than the market had hoped.
This is in stark contrast to past practices, when central banks resumed rates easing after a pause from tightening.
“Given past experiences, markets may have adopted a pricing model that has been appropriate for the last 20 to 30 years, but it is no longer appropriate in the current environment. This comes to show that the previous model is no longer appropriate and markets have to stay informed of policies and ever-changing issues globally,” noted Trinh.
To this end, she is now expecting to see a new regime.
“Central banks do not and cannot operate in a vacuum. With the evolving geopolitical backdrop, it is clear that Western governments are reshaping their priorities to rebuild domestic industrial capacity, reduce current account deficits, enhance labour’s income share and actively use capital to maintain hegemony. This new regime will likely amplify geopolitical tensions and create a more zero-sum game in the global environment,” added Trinh.
Opportunities she foresees against this backdrop include income, a continued emphasis on defensive, quality assets and a greater role for tactical positioning for the remainder of 2023.
Fixed income opportunities in Asia
The diversity and fragmented nature of markets in Asia has made the region a hotbed for investment opportunities. While market watchers have had their eye on China, India and other Southeast Asian countries, the main question has been: what is next for China?
The Asian superpower’s economic recovery slowed in the second quarter and is expected to see additional and more focused stimulus measures from policy makers, being supportive not just for local credits but also Asian markets in general in the second half of the year, noted Murray Collis, senior managing director, chief investment officer, Asia (ex-Japan) fixed income, Manulife IM.
“We have seen evidence of an uneven recovery among the China property sector where SOE-linked developers have typically benefited more from policy easing measures by the Chinese government. We believe these developers, particularly those with stronger focus on tier-1 and tier-2 cities will likely outperform in the second half of the year. For the remainder of 2023, we are constructive on investment grade Chinese property bonds but will remain cautious and highly selective in high yield Chinese property bonds,” he said.
As for other Asian markets, Collins highlighted that their central banks are in a relatively good position to hold monetary policy steady, or even move to an accommodative stance in the coming quarters.
“Within the Asian fixed income markets, we see opportunities, particularly in short-dated Asian investment grade bonds, which currently offer compelling valuations. We see Asian bonds underpinned by moderate inflation pressure and positive growth differential compared to developed markets,” noted Collis.
Chinese manufacturing: one to watch
In equities, it seems the stock markets in Greater China are the ones to watch, following a rebound after the country’s reopening and economic re-acceleration.
Kai Kong Chay, senior portfolio manager, Greater China equities, Manulife IM, sees opportunities in China’s strong manufacturing base.
For reference, its $4.9 trillion manufacturing economy ranked the largest (over 30%) globally in 2021, versus the US and Europe (about 16% each). Despite mainland China’s sheer size and dominance, its manufacturing GDP still showed growth momentum, rising by 9.8% year-over-year (YoY) in 2020-21 and 7.0% YoY in 2021-22, respectively.
“We are witnessing a shift from ‘Made in China’ to ‘Made by China’ given the rising labour costs. Chinese companies are becoming more internationalised by shifting production bases offshore to hedge against rising local labour or environmental costs in China,” noted Chay.
“Mainland China’s focus on technological innovation and manufacturing upgrades is propelling the trend of automation and localisation. Despite shifts in low-tech industries, mainland China has strengthened its foothold in sophisticated sectors like EVs and batteries. With a self-reliant and extensive EV supply chain, it holds a unique position in the global market. While trying to balance customer proximity and manufacturing location, businesses, particularly international original equipment manufacturers, are likely to increase their reliance on Chinese suppliers, signifying a strategic shift driven by mainland China’s successful localisation efforts,” he added.
