I detect a lot of worry about the global economic outlook. This is understandable. Equities are close to, or at, record highs with extended valuations. Growth fears have crept higher on investors’ list of concerns, most notably with signs of softness in the US labour market as well as persistently weak domestic demand in Europe. Add a still-fragile Chinese economy to the mix, despite hopes of stimulus, and the prospect of a leap in economic uncertainty after next month’s US presidential elections, it is no wonder investors are on edge. But what if I told you that global leading indicators are strong and healthy and that combined with falling inflation and falling interest rates, this is one of the best macro-setups for risk assets. I suspect many would reply that such tailwinds already are comfortably priced-in to equity and credit markets. I am sympathetic to that point, but hear me out.
Read MoreFinancial market pundits are a bit like dogs chasing cars; they wouldn’t know what to do if they caught one. And so it is that after trying to figure out whether the economy and markets would achieve a soft landing in the wake of the post-Covid tightening cycle, no one quite knows what to think now that the soft landing appears to have arrived.
Let’s list the key requirements for a soft landing.
Read MoreLet’s start with the good news. The panic brought on by the failure of Silicon Valley Bank, Signature, and more recently, the shotgun wedding between UBS and Credit Suisse has not produced a financial crisis, at least not yet. The bad news is that it could be the proverbial straw that breaks the camel’s back for economies in North America and Europe. We’ve now likely reached the point that markets pivot from looking at the monthly CPI numbers to a broader set of data to determine their view of the world. Investors will be spending a lot of time in Q2 perusing data on lending, deposit flows, and credit standards for evidence that turmoil in the banking is driving tighter credit conditions, and slower growth in the economy. This then will also invite investors to look beyond inflation in forming their view on, and expectations for, monetary policy.
Read MoreIn my day-job I am forced to write my economic outlook for the new year in December, alongside most other economists. This is part of a long-standing sell-side tradition, and at Christmas time, you don’t change traditions. The real way to do it, however, is to way a few weeks into January to see where the dust settles and how investors vote with their money in the early sessions of the year. I thus present the Alpha Sources version; five key questions for 2023, and as many answers. I’ll start with the war in Russia, asking what in fact Russia will achieve, if anything. I then ask whether 60/40 portfolio will rebound in 2023, and whether the leadership in global equities is changing. I then qualify my answer with a question on geopolitics and the free flow of goods and capital between China and the US, before asking whether Covid is over.
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