2023: Surprising start with nod to the future
2023 started well for investors. With returns of more than 10% on global equities and again running yields on bonds, the difference with 2022 could not be bigger. What will central banks do next? And will we continue to watch out for a possible weakening of the economy? KBC pulls the card of more defensive sectors, but also keeps a close eye on technological developments such as AI. Mark Van Assche, account manager Private Banking and Wealth Office, talks about it with Jeroen Van Boeckel, strategist at KBC Asset Management.
Economy & Policy
- Manufacturing is struggling globally, which is exerting pressure on industrial regions such as Germany and China (where the boost provided by reopening the economy after Covid is also disappointing). Business confidence in the service sector is declining, as well. Thanks to lower energy prices and continued job growth, the US economy is holding up better. As a result, the scenario of a mild recession due to the sharp tightening of monetary policy has (again) been delayed a bit longer.
- Recent figures clearly show that inflation has peaked and is now falling further in both the US and Europe, though a brief inflationary flare-up cannot be ruled out on the way. Low energy prices are playing an important role in this situation. However, core inflation is falling at a much slower pace. In China, we are now also seeing consumer price growth dipping below zero, following the example set by producer prices.
- The exceptional stimulus programmes are being scaled back, but there is no sign of savings drift. Programmes such as EU Next Generation and the Inflation Reduction Act in the US continue to be substantial and offer considerable support. China is also stimulating its flagging economy.
- Central banks in the US and Europe have raised key rates at an unprecedented pace over the past 16 months in an effort to slow economic growth and cool inflation. Their work would not appear to be done yet. Although lower energy prices served to reduce total inflation, core inflation remains stubbornly far above their target levels. Both the Fed and ECB recently hiked their key rates again and do not rule out further increases.
- Bond markets are looking forward to the peak of policy rates expected in the fall. However, how soon after that interest rates will be cut remains uncertain and leads to fluctuations in bond yields. Corporate bonds, meanwhile, are benefiting from what is an ongoing robust economy, causing spreads to remain at a low level.
- The second-quarter reporting season has ended and the figures were better than expected, with earnings contracting some 7% in the US and 4% in Europe. The surprises were bigger on Wall Street than in Europe. We’re now looking forward to the quarters ahead. Forecasts for 2024 seem to be running a little too high when, in line with the economy, turnover growth is expected to weaken somewhat and companies will have more difficulty passing on higher wage and other costs.
What risks do we see?
- Core inflation remains at a high level in both and the US. That persistence is affecting the policies of central banks and, consequently, economic growth. Sentiment could reverse as a result.
- Furthermore, after the manufacturing sector, the services sector is now also in decline both in Europe and China.
The US economy is holding up well, while growth in Europe and China is disappointing. Lower energy prices are pushing inflation lower, but core inflation remains too high, making hopes of a quick reduction in interest rates seem vain. Stock markets are expecting a very soft economic landing and that entails risks.
Siegfried top, Senior Investment Strategist KBC Asset Management
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