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The Macro Viewpoint - The 2023 outlook, and the return of EM bulls
44 Plays2 years ago
Janet Henry explains why a near-term slowdown in inflation will not warrant rate cuts from the major central banks in the coming year. Murat Ulgen finds investors are turning more bullish in our latest EM sentiment survey.
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Transcript
Podcast Introduction
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes.
00:00:16
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Thanks for listening, and now onto today's show.
The Macro Viewpoint Overview
00:00:23
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You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
00:00:30
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This podcast was recorded on Thursday, the 15th of December, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
00:00:43
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Hello and welcome to our final programme of 2022.
00:00:48
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Coming up today, as policymakers battle slowing growth and soaring inflation, we look at what 2023 could hold in store for the global economy.
00:00:58
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And are emerging market investors finally turning more bullish?
00:01:03
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We assess the results of our latest EM sentiment survey.
Global Economic Trends Discussion
00:01:10
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Hello, I'm Aline Van Dyne in New York.
00:01:14
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And I'm Piers Butler in London.
00:01:16
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It's been a tough year for the global economy, with growth slowing and high inflation, putting the major central banks in tightening mode.
00:01:24
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Financial markets now seem to be priced for a rapid,
00:01:27
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pain-free drop in inflation that warrants rate cuts sooner rather than later.
00:01:33
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But does the evidence back this up?
00:01:36
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Janet Henry, our global chief economist, has just published her outlook for 2023.
00:01:41
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She spoke to Peter Stegall earlier.
00:01:43
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Janet, welcome to the podcast.
00:01:46
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Thank you.
00:01:46
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So there was better news than many expected in the second half of 2022.
00:01:51
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But where do you see the economy heading in 2023?
00:01:54
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Yes, you're right.
00:01:56
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Certainly a lot of economies were actually a little bit more resilient than we'd feared for a lot of 2022.
00:02:03
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It's just that it has become increasingly apparent, certainly in the survey data and in some of the high frequency data, that much of the global economy is going to stall in early 2023.
00:02:16
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We've already seen some weakening trade data and I think we'll probably see more of that because the fact is global goods demand is already slowing down and inventory levels are high.
00:02:26
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So industrial production is certainly going to be weaker.
China's COVID-19 Policy Impact
00:02:30
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And of course, we still have that ongoing housing market adjustment with mortgage rates so high, weakening housing markets on the back of falling house prices and a lot of the slowdown in housing related activity will be feeding through into weaker growth and is playing
00:02:45
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quite a key role in some of the recessions that we're forecasting in parts of the world.
00:02:50
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China is reopening as it eases COVID-19 related restrictions.
00:02:54
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What does that mean for global growth?
00:02:56
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Yes, that could certainly pose some upside risks to 2023.
00:03:00
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We've obviously seen an earlier than expected lifting of restrictions in China.
00:03:05
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We've also seen a much more convincing package of measures to stabilise the property market.
00:03:11
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There's just quite a lot of uncertainty about the path of growth.
00:03:16
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It looks set to be somewhat more volatile.
00:03:19
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because the experience of elsewhere in the world has shown that when you get the initial reopening, you tend to get quite a big jump in COVID cases.
00:03:28
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So there could well be a setback in early 2023.
00:03:33
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Mobility could be hit and a lot of the anticipated improvement in in-person activities actually get a bit more delayed to a little bit later in 2023.
Global Inflation and Wage Influences
00:03:43
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How does China's reopening impact global inflation?
00:03:46
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In 2022, the weakening demand for various commodities, particularly oil, that came through from weak growth in China, obviously impacted on various prices.
00:03:58
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In 2023, if we do get the revival that we're forecasting in China, then it's going to be much less of a disinflationary influence.
00:04:07
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And what about the outlook for inflation and wages?
00:04:10
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Well, globally, we've actually recently seen some better news that the fall in the oil prices and some heavy discounting of goods prices has finally led to some downside surprises on inflation.
00:04:23
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And inflation certainly seems to have peaked in a number of places already.
00:04:28
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But what we see in the near term doesn't necessarily tell us about the medium term outlook for inflation.
00:04:34
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We've obviously argued in the past that there are a lot of structural changes that could keep it higher.
00:04:39
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But for central banks, their main focus will be, as you say, what happens to wages and therefore to labour markets.
00:04:49
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wages lag any drop in headline inflation.
00:04:53
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And that's what they will be mindful for.
00:04:55
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And that's why they'll be keeping an eye on when they set policy.
Federal Reserve Policy and Forecasts
00:05:00
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Some observers seem to expect rate cuts from the Federal Reserve in 2023, possibly even in the first half of the year.
00:05:07
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What's your view?
00:05:09
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I think it's unlikely that we see rate cuts in 2023.
00:05:12
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At the moment, we're still on a tightening cycle.
00:05:15
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We expect the Federal Reserve to raise rates by another 50 basis points at the February meeting and possibly a little bit more after that.
00:05:23
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It will depend on whether we have seen a weakening in the labour market,
00:05:27
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and some moderation in wage growth as well as a continued decline in core inflation.
00:05:32
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And because of our view that it's going to take longer for inflation to get back to target than even the Fed is forecasting, we think that rate cuts are unlikely before the middle of 2024.
00:05:43
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Overall, markets seem pretty optimistic as we head into 2023.
00:05:48
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What do your forecasts suggest?
00:05:50
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Yes, markets are pretty optimistic forecasting those rate cuts, but a pretty soft landing based on what certainly seems to be priced into equity markets.
00:06:00
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If we get rate cuts in 2023, I fear it's going to take a much harder landing than the Federal Reserve or ourselves are forecasting.
00:06:09
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Our forecasts are for a marked slowdown in global growth in
Asian Markets Insight Preview
00:06:13
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2023.
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We've got global growth at 1.9%.
00:06:15
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It's edge just fractionally lower because of downgrades to China and to India.
00:06:21
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And our forecast for the US is a little bit lower than the Federal Reserve's.
00:06:25
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And in 2024, we have got some improvement.
00:06:29
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We've actually revised up slightly 2024, largely because of the timing of the Chinese recovery, which has a carryover effect.
00:06:39
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And for inflation, while we've lowered our forecast for the US for 2023, largely because of the lower oil price feeding through, as well as a bit more goods price inflation,
00:06:51
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Our forecast for 2024 is still that it's going to take somewhat longer to get back to central bank kind of projections.
00:06:59
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So our global inflation forecast for 2024 is still at 4.6%.
00:07:04
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So overall, we have a worse growth inflation trade-off than currently seems to be priced into financial markets and indeed currently reflected in central bank published forecasts.
00:07:19
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Janet, thank you very much.
Emerging Markets Sentiment Survey
00:07:20
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Thank you very much.
00:07:25
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I'm Harold van der Linde.
00:07:26
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And I'm Fred Newman.
00:07:27
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And you can find us under the banyan tree.
00:07:29
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Join us weekly on our new podcast where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
00:07:41
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
00:07:50
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Enjoy the rest of your podcast and we'll see you under the banyan tree.
00:07:55
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This week, we released the 10th edition of the HSBC Emerging Markets Sentiment Survey.
00:08:01
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The survey canvassed the opinions of investors responsible for nearly half a trillion dollars of assets under management in emerging markets.
00:08:10
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Murat Olgun is Global Head of Emerging Markets Research, and he joins us now.
00:08:15
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Murat, welcome to the podcast.
00:08:17
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Thank you very much.
00:08:18
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Murat, in the last survey back in September, emerging market investors were quite bearish.
00:08:24
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Now, three months on, the picture has changed quite significantly, hasn't it?
00:08:30
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Yes, indeed.
00:08:31
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I think in the survey, there is a very distinct improvement in EM investors' sentiment.
00:08:35
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So the investors who are now bullish on EM prospects over the next three months
00:08:39
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they've nearly doubled to 29% from 15% in the previous survey in September.
00:08:45
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And those who are bearish, they're a lot much reduced to 18% from 41% earlier.
00:08:51
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This actually brings the net of bullish versus bearish sentiment to a positive level for the first time since July 2021 survey.
00:08:58
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And what's driving this more bullish sentiment?
00:09:01
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So this survey was conducted when there was a rebound of sorts in global financial markets.
00:09:07
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There was a better risk-taking environment.
00:09:09
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This was on the back of easing inflation concerns, expectations of a slowdown in monetary tightening by major global centre banks, as well as news regarding China reopening and the measures to support its property sector.
00:09:23
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I think all these have played a role in terms of the improvement in EM invested sentiment.
00:09:28
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So are investors more willing to put more of their cash to work?
00:09:32
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They are actually.
00:09:33
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The cash levels, they reflect this change in the mood.
00:09:36
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We take the weighted average cash levels, which have fallen to 6.1% of assets under management from 6.6% earlier in the September survey.
00:09:45
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This is actually the first decline in five quarters.
00:09:48
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And in addition, when we ask investors whether they're willing to increase their cash levels, only 8% said so.
00:09:55
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And this is the lowest in service history.
00:09:57
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So there has been a change finally in the cash levels after five consecutive courses of
Regional Investment Preferences
00:10:02
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increase.
00:10:02
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Now we're seeing some fall in overall cash piles.
00:10:05
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And which regions are most favored?
00:10:08
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So this better mood for EM is reflected first and foremost in Latin America.
00:10:13
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This is the region with the net sentiment score that is once again positive across all asset classes.
00:10:19
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It's followed by Asia, though the preference here seems to be more for FX and equities over fixed income.
00:10:26
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This could be because of better China growth outlook and also delayed pickup in inflation, where the region centre banks are still tightening monetary policy while they seem to have stopped in other EM geographies, broadly speaking.
Emerging Market Risks
00:10:39
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And then Central Eastern Europe still stands out as the region with net negative sentiment across all asset classes, albeit a bit less so compared to the September survey.
00:10:49
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However, Murat, there are still a lot of risks out there.
00:10:52
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What are investors most worried about?
00:10:54
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There are still risks out there.
00:10:56
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Investors are equally worried about a recession in major economies and Fed developed market tightening.
00:11:03
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We asked them again the question about the projections with regards to the recession risk over the next two years.
00:11:09
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They seem to have moderated a bit, especially for the US, but they still remain fairly high.
00:11:14
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So recession risk and continued monetary tightening by the Fed and developed market center banks are still the two major risks for emerging market investors.
ESG Portfolio Engagement Decrease
00:11:22
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Finally, Murat, what did the results show about engagement with environmental, social and governance issues?
00:11:29
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So we've seen a bit of a retreat in the engagement.
00:11:32
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29% of investors are now saying they're running an ESG portfolio either directly or indirectly.
00:11:39
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This was 33% in the previous September survey, so a bit of a fall in here.
00:11:43
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We think this could be partly explained by the earlier findings of our ESG teams in their ESG sentiment survey, and we're making some references to their survey findings in this report as well.
Podcast Conclusion
00:11:55
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Murat, thanks very much for your time.
00:11:58
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Thank you very much.
00:12:01
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So that's all from us this week and indeed for 2022.
00:12:05
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Thanks to our guests, Janet Henry and Murat Olgun for talking to us and to all our guests who have joined us on the podcast throughout the year.
00:12:13
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From all of us here, we hope you've enjoyed the programme.
00:12:16
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We'll be back again in the new year.
00:12:38
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:12:42
Speaker
We hope you enjoyed the discussion.
00:12:44
Speaker
Make sure you're subscribed to stay up to date with new episodes.