Global markets face multiple headwinds in 2023 as many parts of the world struggle to control inflation.
“Early on in 2023, it seems like a recession is pretty much a given,” said Amber Sinha, senior portfolio manager of global equities at CIBC Asset Management, in a recent interview.
Wage growth has not been able to keep up with inflation and, as a result, consumers have had to accept declining incomes, he said. Rising interest rates have affected payments with variable rates, such as mortgage or car payments, and have subsequently weakened demand.
And while rising rates and sticky inflation have dominated the headlines for the past year, Sinha said 2023 is the year the impact will be felt by consumers.
“I think certainly it will be a little bit more difficult for people in 2023,” said Sinha.
However, the starting point for markets this year is better. The MSCI World Index dropped approximately 20% in 2022, and according to Sinha, stock prices today are reflecting some of the weakness that is yet to come. And valuations are more favourable than they were at the start of 2022 when interest rates were near zero.
However, Sinha said consensus expectations don’t reflect the drop in earnings growth companies are likely to experience. Once expectations start to reflect that, he said, the market will become more attractive.
We’ll also start to see more of the symptoms of high inflation and interest rate hikes this year, with unemployment rising.
“When we see the symptoms, it’s probably a good sign to be in the market,” he said. “But I would say for now it seems a little too soon.”
Some regions will fare better than others. Europe faces the biggest headwinds, Sinha said. The European market has rallied since the lows of October 2022, as energy prices softened and fears of a crisis have abated.
“Essentially, we’ve seen the market rally hard on not very much except for a warmer winter,” Sinha said, and the continent is still at risk from the Russia-Ukraine war.
Europe is also dealing with higher inflation than North America, which adds to its vulnerability. Levels of debt are high in Europe, so even minimal moves in interest rates can create problems.
Asia, on the other hand, looks attractive, Sinha said, thanks largely to China’s reopening.
Asia also tends to have pretty clean balance sheets on both the corporate and consumer sides, Sinha said, so there’s less risk in a rising rate environment. Asian economies are also generally faster growing and, as a result, they tend to have structurally higher inflation and “are better shielded from rising rates,” Sinha said.
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