4Q 2022 | Guide to the Markets
Growth slowdown required to tame inflation
There is still considerable uncertainty about the path ahead for inflation, and the scale of the slowdown required in western economies to bring it back to target (Guide to the Markets – Europe pg 22). Markets expect central banks to deliver substantial further rate hikes ahead (pg 10), while governments look to soften the energy-related hit to consumer incomes via easier fiscal policy (pg 39). Housing markets are already feeling the squeeze from higher rates (pg 23), although labour markets across the developed world remain resilient so far (pg 8). The policy mix warrants caution in the near term, although a significant amount of bad news about the outlook already appears to be contained in equity prices (pg 64), even with earnings downgrades likely ahead.
China’s economy faces a different set of challenges
While Chinese policymakers are not grappling with the same price pressures that we see in the West (pg 6), the economy faces a different mix of problems. Persistent lockdowns stemming from Beijing’s focus on the zero-Covid policy have weighed on economic activity this year (pg 41), despite an improvement in credit growth. Concerns around the property market have further weighed on sentiment. Geopolitical risks are also back on investors’ radars, although comparisons to Russia’s invasion of Ukraine ignore the very different economic circumstances (pg 46). Importantly, Chinese markets have now fallen a long way from their peak last year, creating ample room for a recovery in 2023 if risks fade (pg 63).
Fixed income prospects have improved following substantial pain
The sell-off across fixed income sectors year-to-date has been painful (pg 73). Yet looking forward, the sharp increase in government bond yields (pg 67) should in turn make it easier for investors to build balanced portfolios. Yields have re-rated across the board (pg 66). Risks to government bond yields remain two-sided, but slowing inflation should help fixed income to become a more reliable diversifier against risk assets once again (pg 72).