Looking at the global economy as we prepare to enter 2003, three observations stand out:
1. The US Federal Reserve will raise interest rates until the rate peaks at around 5%. After that, increasing market turbulence from a big credit event and/or severe economic slowdown will lead the Fed to start cutting rates in the second half, which will prevent the US economy from falling into a deep recession. Meanwhile, Europe will face high and rising energy bills, driving up the cost of living and causing stagflation.
2. China will continue to relax Zero Covid, as evidenced by reports this week that it is considering abandoning the quarantine requirement for travellers from abroad. We believe Beijing can abolish Zero Covid entirely by the second quarter, or even faster.
3. We believe that the Russia-Ukraine war and tensions in the Taiwan Strait will stabilise next year, neither escalating nor de-escalating. Nevertheless, geopolitics will remain the main cause of concern in the coming year.
Closer to home, we believe the Thai economy will slow down compared to 2022. It will grow the fastest in the first quarter before starting to lose momentum for three main reasons.
- The global economy will severely slow down in the second half of the year. This will result in a decline in exports.
- Private consumption will be an important driver of the economy. But other drivers such as private investment and government spending (both consumption and investment) will weaken.
- The tourism sector will be a major driver of economic growth, with between 21 million and 25 million foreign tourist arrivals, up from 10 million this year.
DIVERGING OUTLOOKS
With the world economy, especially developed markets, in mild recession, the divergence of growth, interest rates and inflation between developed and developing countries will become clearer. This creates both risks and opportunities to invest in various assets as follows:
- Commodities: Although prices will be high, the trend for commodities in general and energy in particular may be for a marginal decrease from this year. This would reflect a drop in demand as western economies slow, even as the Chinese economy starts to recover from the second quarter onwards.
As a result, global oil demand will decrease marginally, but major producers like Opec may not be willing to cut production by much. The result could be an oversupply of about 2 million barrels per day, or roughly 2% of world consumption.
However, we believe the major risk factor for commodity prices is geopolitical. The war in Ukraine may not increase in intensity but it will not ebb either. This leads us to believe that it will generate a "war premium" of around $10 per barrel of oil. Brent crude could average around $92, 10% lower than this year's estimated average.
- Fixed-income assets will produce better yields next year. With a second-half recession pushing down interest rates, bond funds will yield better returns next year compared to this year.
It is possible that long-term interest rates will decrease by about 50 basis points, while short-term interest rates will decrease more than 100 bps, which will cause bond yield spreads to normalise.
- Stocks are difficult to analyse because of many unique factors. But if we time the market well, we believe 2023 could be a high-yielding year, especially after interest rates begin to fall. Looking at five markets -- the US, Europe, Japan, China and Thailand -- our investment recommendations based on five criteria are summarised as follows.
1. Valuations, measured by P/E (price/earnings) ratios. We have found that US stocks are the most expensive, whether based on historical performance or when compared to other countries. Chinese stocks are the cheapest by the same two measures, while European, Thai and Japanese markets have attractive prices.
2. Economic prospects, measured by economic growth. The euro zone economy is the most worrying, while the US and Japan can expect low growth. The Thai economy is potentially interesting while the Chinese economy will grow by the most next year.
3. Politics, with Europe being the main concern if the Russo-Ukrainian warworsens. US politics is a concern in that the recent midterm elections resulted in the Republicans gaining control of the House and the Democrats keeping the Senate. The likely result will be legislative gridlock. Political prospects in Thailand and China are more stable, while in Japan, prospects might improve due to the opening up of the tourism sector.
4 & 5. Monetary and fiscal policy: The former is measured by the policy interest rate at the end of the year and the latter by government financial disbursements. By this gauge, the US and China have relatively tight monetary policies, while Europe has a tight fiscal position. On the other hand, Japanese monetary policy could become mildly restrictive now that the Bank of Japan has changed its yield curve control policy. Meanwhile, China will have the most relaxed fiscal position next year, following the Politburo's decision to promote a stimulus budget.
Based on the above five gauges, the US and European stock markets stand to be the riskiest next year. The Chinese market is the most interesting, while the Thai and Japanese markets are moderately attractive.
However, all of the above is just a rough picture. In our 2023 yearbook, we offer a more detailed look at the investment path and timing in each interesting market. In short, we believe that in the first half of the year, economic risk makes investment in the US market risky, while the reopening theme will support Asean markets.
In the second half, the relaxation of US monetary conditions should make investment in the world's largest economy more interesting, while investment in China will be the most interesting, especially after the government confirms its reopening policy.
On the final note, we wish all investors good luck with investing in 2023.
Dr Piyasak Manason heads the Wealth Research Department at InnovestX Securities Co Ltd
