Spring is coming (but may be late)
Three things to watch in 2023.
A China pivot Last year was all about President Xi Jinping flexing his political and policy chops ahead of the 20th National Congress, where in October the party elected him to an unprecedented third term. This year it’s all about reinvigorating a Chinese economy that, except for Covid-impacted 2020, grew at its slowest pace in four decades in 2022 amid Covid lockdowns and private enterprise crackdowns. Stepped-up fiscal stimulus, monetary easing and a lighter regulatory hand could do the trick. Raging Covid cases, a debt hangover from overdevelopment, an aging population, slowing labor force growth and diminished comparative labor advantages may slow reopening. But high household savings, policy flexibility and a fading dollar (more below) represent strong economic tailwinds, with comparatively low valuations positives for equities.
A delayed energy rebound Oil prices have plunged off the last year’s highs—West Texas Intermediate in fact is now below where it stood at the beginning of 2021. Natural gas prices are down sharply, too, in part on a milder-than-expected winter so far. Easing demand from possible recessions in the U.S. and Europe could further ease pressures. All this could provide near-term support for European equities given their comparatively low valuations. Still, a reopening China, and the spillover effects that would have on the global economy and all of Asia in particular, should prove to be the bigger driver on energy prices over the next 12 months given supply constraints created—and exposed—by a war in Ukraine that shows little sign of ending anytime soon.
A dollar fade This already has started, with the dollar in the final two months of last year retracing roughly half its gains off early 2021 lows. This may provide a technical underpinning for a short-term counter rally, some of which we’ve seen in the early days of the new year. But mid to longer term, the dollar’s rally should continue to fade as Fed rate hikes slow and eventually end, inflation continues to moderate and overseas growth, especially in emerging markets that already have taken their monetary medicine and are now benefitting from elevated resource prices, gain ground relative to the U.S. and Europe. This should create alpha opportunities in many EM countries.