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LGT Beacon: Investment perspectives January 2023

January 19, 2023

  • Equities have the best start of a year in a generation as last quarter’s risk-on sentiment returns
  • China’s swift reopening buoys global equities while the drop in longer-term interest rates supports credit
  • Relative growth dynamics shift in favor of Asia, as macro and policy cycles begin to diverge
  • Continued rate hikes in the West and a possible tightening in Japan leave trip wires in financial markets
  • Headline inflation will ease as goods’ prices deflate but broader services inflation will remain sticky
  • China’s abrupt exit from Zero-COVID policy accelerates cyclical rebound but structural issues remain in place
  • Investment decisions: raise emerging Asia equities and end USD overweight, but maintain overall defensive tilt

The positive momentum of the last quarter has extended into the start of the new year, with equities rising and interest rates trading well below recent highs. In the US, a slowing economy, falling inflation rates, and softer wage gains weighed on government bond yields, with the US yield curve dropping about 50 basis points year-to-date. In Europe, a rather mild winter led to steep declines in regional natural gas prices, which reduced inflation pressures and bolstered expectations for a softer than forecast recession. In Asia, China has abandoned its strict Zero-COVID policy almost overnight, reopening its economy much faster than even the most optimistic market watchers had dared to predict – and prompting most of them to rush to upgrade their macro outlooks for the second-largest economy.

Against this backdrop, the global growth outlook appears more robust now than it did just a few weeks ago, allowing markets to start 2023 on a strong footing. Below we provide our current macro and investment views in a nutshell.

Policy divergences shift relative dynamics in favor of Asia

China’s rapid reopening has taken everyone by surprise, including, unfortunately, the wider population. While the resulting nationwide health care crisis instantly depressed socioeconomic activity in many areas, for the wider economy this should be good news in the medium term. The urban mobility data suggests that in big cities such as Shanghai and Beijing, a recovery is already under way. That said, some caution is due with a view to the Lunar New Year holidays later this month, which could cause further outbreaks and underwhelming economic data in the months ahead. There are also broader structural headwinds in place that to some extent limit the growth potential of the second-largest economy in the longer term.  

Nevertheless, investors and analysts alike are looking ahead to a brighter cyclial outlook for China this year, which should have an overall net positive impact on global growth as well. The emerging Asian economies, which have the fewest reservations vis-à-vis engaging economically with China, stand to benefit most from this reopening. The fact that the Thai Prime Minister personally welcomed the first incoming Chinese tourists with flowers at the airport in Bangkok earlier this month, when many developed economies rushed to restrict entry, illustrates this point.

To read the full report, click on the link: LGT Beacon

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Note: The next edition of the LGT Beacon is scheduled for February 2023.