KUALA LUMPUR: The aggressive pace of interest rate tightening and associated lag effects are expected to drive a synchronised global growth downturn through 2023, Manulife Investment Management (Manulife IM) said.
The asset management company said the most advanced and interest-rate-sensitive economies would experience recessions in the first half (1H), while Asia may see a slow-motion recovery due to a fuller economic reopening in mainland China, Hong Kong, Japan and Taiwan markets.
Further improvement in sentiment, with a bias toward more defensive assets in the near term, will likely result in continued outperformance of investment-grade bonds and a noticeable rebound for high-yield assets.
Manulife IM co-head of global macro strategy Sue Trinh said that amid a macro backdrop characterised by elevated global inflation, uncertainty over when the US Federal Reserve (Fed) rates might peak, and rising odds of a worldwide recession, the 1H of 2023 could bear witness to a series of sharper and more prolonged bouts of market volatility.
"Thankfully, the picture does brighten slightly in 2H, during which these headwinds are likely to moderate, ushering in more conducive conditions for financial markets.
Our base case is that the looming negative demand shock would be sufficient to see growth concerns overtake inflation worries, and that could pave the way for the Fed to take a dovish pivot and ease rates during the fourth quarter (Q4) of 2023.
"The main risks to our base case are around the timing of the stagflation trough, China's full reopening and the US dollar's peak," she said in a statement today.
Manulife IM Asia ex-Japan equities chief investment officer Ronald Chan said the company is seeing signs of a rebound in the China economy given the government's lifting of some Covid restrictions.
"China will be one step closer to a rebound when we see further loosening prevention measures and a decline in confirmed cases within the country.
"We expect the upcoming Central Economic Work Conference will release more supportive policies in terms of fiscal and monetary sides, which will be a positive sign for the equity market," he said.
Chan added that Manulife IM is also positive on longer-term thematic investments, including advanced manufacturing, machinery and semiconductor, which could potentially increase local demand.
"We become more selective on renewables and other beneficiaries of carbon control within the region.
"To price into companies that offer great value and growth opportunities amid uncertainties and lower fundamentals, selectivity will be critical in 2023 and beyond.
"Although we expect global inflation to slow down gradually in the year ahead, we still need to pay close attention to it.
"We see risks of economic recession in developed economies, which will continue to add volatility to Asian markets in the first half of 2023.
"However, when interest rates peak, the overall outlook will become clearer," he added.
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