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WeekWatch -‘recession fears proved too much and halted the progress of global markets last week’ January 23

WeekWatch -‘recession fears proved too much and halted the progress of global markets last week’ January 23

Having clambered up the Wall of Worry since the start of the year, recession fears proved too much and halted the progress of global markets last week.

Observers suggested that the market narrative may be shifting from a focus on central banks’ rate hiking cycle to the growth slowdown.

After a three-year hiatus, world leaders gathered in Davos for the World Economic Forum’s annual meeting. Casting a shadow over the event was the WEF’s survey of senior economists, which showed two-thirds of them expect a global recession this year.

However, there was a more optimistic mood among leaders attending the conference. Boosted by positive data from Europe and the US in recent weeks, Gita Gopinath, Deputy Managing Director of the International Monetary Fund, signalled that the fund would upgrade its 2023 growth forecasts. Germany’s chancellor said that the eurozone’s largest economy would avoid recession, while think-tank ZEW said its monthly gauge of investor sentiment had turned positive for the first time since Russia’s invasion of Ukraine.

The week began with the FTSE 100 Index closing in on the record high it set in 2018, and European markets nearing a nine-month high on rebound hopes in China and easing inflation fears. However, by the end of the week, weak retail sales data and news of falling consumer confidence reminded investors about the gloomy outlook for the UK economy.

Responding to news that UK inflation slowed to 10.5% in December, Bank of England Governor Andrew Bailey suggested it could be a sign that “a corner had been turned” and that inflation could be on an “easier path”. However, the Bank believes the UK is still likely to fall into a long, shallow recession. Bailey also said that the risk premium on UK assets, created by Liz Truss’s budget programme last year, had “pretty much gone”, but that confidence remains fragile.

In the aftermath of that turmoil, interest rates were forecast to rise to 6%. However, markets now predict a peak of 4.5% and that the BoE will raise the base rate to 4% on 2 February.

In the US, Google’s parent company Alphabet became the latest tech giant to announce huge job cuts, following the lead of Microsoft and Amazon. It’s estimated that over 200,000 industry employees have lost their jobs in the US since the beginning of 2022, as the hypergrowth enjoyed by the sector during the pandemic era unwinds.

The dollar has seen its steepest fall since the aftermath of the global financial crisis and hit a seven-month low on Wednesday as bigger-than-expected declines in US retail sales and producer prices fanned speculation that the Federal Reserve will ease its approach to interest rates. It is increasingly expected to shift to 0.25-point increments.

“We currently have traders putting a five per cent chance on a 0.5 percentage point increase at the next Fed meeting. It’s not often you get that kind of certainty,” suggested Columbia Threadneedle.

The slide in the dollar has boosted emerging market stocks. A weaker dollar helps cut commodity import bills for emerging markets and makes it less expensive to service debt in the currency. The MSCI Emerging Markets index has risen 8.3% this year, compared with a fall of 22% in 2022.

Another driver has been the re-opening of China’s economy from COVID-19 lockdowns, which has happened faster than expected. The near-term outlook for the economy has certainly brightened, and consumer-facing sectors look set to benefit most from the pent-up demand.

Data released last week showed that China’s economy was far more resilient in the fourth quarter than anyone expected; GDP stalled at 0.0%. However, growth of 3% over 2022 constituted China’s worst economic slump in nearly half a century.

A Reuters poll forecast growth to rebound to 4.9% in 2023. A strong rebound in China could ease global recession fears, but could also cause more inflationary headaches, just as policymakers are starting to get it under control.

But better growth this year is unlikely to mark the end of the structural slowdown that began more than a decade ago. Figures from the National Bureau of Statistics showed that China’s population dropped last year for the first time in six decades.

Acknowledging the challenges of last year, and the uncertainties of 2023, Artisan Partners reminded investors of the importance of sitting tight. “Rising interest rates, the war in Europe and the prospect of a recession loom over the stock market, keeping stocks cheap.

“Turns in the market come very quickly, out of nowhere and often when things feel the worst. Wars end. Inflation ebbs. Recessions come and go. Ultimately, valuation is the best measure of future returns. We have added aggressively to our holdings in this past year at attractive valuations. We expect to be very well rewarded for buying when others are selling.”

Artisan Partners and Columbia Threadneedle are fund managers for St. James’s Place.

 

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