As the second half of the year kicks off, our analysts are more convinced than ever that a deep recession can be avoided. In our 3Q23 Quarterly Investment Strategy, we detail the four key trends that we expect to unfold. Here is a brief summary.
1. Room for more optimism
At the start of the year we asserted that markets in 2023 would ultimately be driven by inflation, global economic conditions and central bank responses. We were relatively optimistic that these macro-fundamentals would not lead to a market crisis. At the halfway point of the year, we note that within global economic indicators, green zones are now replacing red zones.
Figure 1: Global Purchasing Managers’ Index (PMI)*
Source: S&P Global, May 2023
* where available composite PMI otherwise manufacturing PMI*. The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
2. Inflation to improve further, but rate cuts unlikely this year
While most economists had called for a recession in 1H23, many are now delaying their recession expectations to 4Q23 or early 2024. This is because headline inflation is down and core inflation (i.e. ex food and energy) has moderated but perhaps not fast for all central banks to end interest rate hikes.
Figure 2: US Core CPI 3 month % A.R
Source: Macrobond, March 2023
3. Uneven trends, but no hard landing
We still expect an economic slowdown or technical recession in the later half of the year. However, this is unlikely that to involve significant increases in unemployment. Rather, we increasingly think the global economy is suffering rolling recessions where certain goods sectors will experience recession-like conditions, but broad service sectors will not. As such, over the full year, global GDP is unlikely to be negative.
Figure 3: GDP weighted composite: China, India, Korea, Indonesia and Taiwan (%)
| 2023F (Previous) | 2023F | 2024F | |
| Global | 2.4 | 2.5 | 2.8 |
| US | 1.0 | 1.1 | 0.8 |
| Eurozone | NA | 0.6 | 1.0 |
| Japan | NA | 1.0 | 1.1 |
| Asia ex Japan | 5.1 | 5.3 | 4.9 |
| China | 5.3 | 5.7 | 5.0 |
Source: UOBAM, Bloomberg, 16 May 2023
4. Positive high grade fixed income, neutral equities
We continue to overweight high grade fixed income as a beneficiary of higher yields and the expected near term pause in interest rate hikes. Equities have room to surprise if the global economy proves more resilient than expected. However, this asset class carries greater risks on a risk adjusted basis. As such, we maintain our neutral weighting across all major regions, while noting that there are good stock and sector picking opportunities.
Figure 4: Global investment strategy, 3Q23
Source: UOBAM, June 2023
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