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Monetary policies will remain the key determinant of the direction of equity markets and the choice between growth and value.<\/p>\n
Zehrid Osmani, portfolio manager at Martin Currie, said adjusting monetary policy expectations had been the dominant driver of share price returns in 2022.<\/p>\n
Osmani expects this trend to continue in 2023 whilst the uncertain environment around inflation remains.<\/p>\n
The big question is how much central banks will need to continue to hike interest rates to combat the elevated inflationary pressures.<\/p>\n
Central banks are focused on inflation. They have effectively moved from doing whatever it took to prop up growth to whatever it takes to reduce inflationary pressures.<\/p>\n
During 2023, if inflationary prints overshoot expectations, monetary policies will likely need to further adjust upwards.<\/p>\n
It will weigh negatively on equity returns and quality growth style, to the detriment of value.<\/p>\n
Inversely, if inflation undershoots, monetary policy expectations will adjust downwards, supporting equity markets and the quality growth style.<\/p>\n
\u201cThere is a likelihood that central banks start shifting their focus toward growth in 2023 if recessionary concerns grow significantly, as we detail further down,\u201d Osmani said.<\/p>\n
A sharp slowdown in 2023 remains Martin Currie\u2019s core scenario.<\/p>\n
\u201cWith leading indicators both on the manufacturing and services sides continuing to deteriorate, we believe that 2023 will be a year of low growth at the global and U.S. levels,\u201d he said.<\/p>\n
\u201cWe also believe that Europe is heading into stagflation.\u201d<\/p>\n
\u201cAn ongoing sharp slowdown in 2023 remains our core scenario at the global level with a probability of 65% to 70%.\u201d<\/p>\n
\u201cWe have also increased the probability of global stagflation in 2023 to 30% to 35%, up from 25% to 30% previously.\u201d<\/p>\n
The Chinese economy will be a key determinant of the global economic cycle since it is the second largest globally.<\/p>\n
It will be difficult to predict the momentum in the Chinese economy, given the ongoing internal policy of zero-COVID, which could lead to periodic renewed regional lockdowns.<\/p>\n
\u201cChina will be unlikely to change its stance on its zero-COVID policy, given its less active and less efficacious vaccination program and healthcare infrastructure,\u201d he said.<\/p>\n
\u201cAny shift in policy stance on this front by Chinese authorities could lead to a rapid improvement in the country\u2019s leading indicators.\u201d<\/p>\n
The improvement would, in turn, lead to an improvement in the global economic cycle.<\/p>\n
For Europe, Martin Currie maintains its probability of stagflation at 70%, with a probability of a sharp slowdown at only about 30%.<\/p>\n
Europe\u2019s economic momentum will be influenced by Chinese indicators, given the exposure to China by the European Union region and the more cyclical exposure of the European market.<\/p>\n
Energy supply risks in Europe will likely come back in focus again as we approach the winter 2023 months.<\/p>\n
Any renewed risk of energy rationing could put further downward pressure on economic activity in that region in the second half of the year.<\/p>\n
Geopolitical risks remain omnipresent, both in Europe and Asia.<\/p>\n
The Russia-Ukraine conflict remains an important focal point, with a risk of escalation in the conflict and broadening of the conflict to the NATO block.<\/p>\n
The ongoing energy supply risk for Europe will also be important, with the EU block needing to continue to make progress toward eliminating its dependence on Russian gas.<\/p>\n
\u201cUltimately, we believe that Russia\u2019s importance on the international scene will have been permanently diminished,\u201d Osmani said.<\/p>\n
\u201cA resolution to this conflict could be an important driver of a risk-on rally in European equities in our view.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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