11 OCT, 2023
By Brian O’Reilly, Head of Strategy at MIFL.
Markets have changed significantly since the end of 2021. The combination of decreasing inflation, persistent low unemployment, a resurgence in economic momentum, potential stimulus in China, and central banks nearing or reaching the end of rate tightening cycles have left a very different picture to the one we had after the pandemic and could set a favorable stage for investments.
As economies reopened after the global pandemic, investors were focused on higher energy and commodity prices, disruptions caused by the global lockdowns, and the resulting rise in inflation.
The biggest change since the end of the pandemic has been that inflation has started to fall. Although the war on inflation is not won, central banks are winning the battle, and interest rate hikes are having the desired effect.
In the United States, inflation has fallen back to 3%, its lowest level in two years, while in Europe it is also falling, albeit remaining above 5%.
As for global growth, at the start of 2023, most market observers were expecting that the combination of high levels of inflation and rising interest rates would cause consumers to moderate their spending, leading to a contraction of global economies. However, that didn’t happen. How come? This is mainly due to robust household balance sheets, especially thanks to substantial savings built up during the pandemic when there were limited opportunities to spend.
This unexpected macro backdrop has provided stability and a positive impetus to equity and bond markets so far this year.
However, countries that maintained lockdown restrictions for longer, like China, are still feeling the negative effects of the pandemic, which has resulted in disappointing economic growth data. Consumer confidence and therefore consumer spending have not been as strong as expected there.
For example, ‘revenge spending’ by the Chinese middle class after the COVID-19 reopening did not happen to the extent it did in the West. Personal savings in China were built up from saved earnings, not from COVID payments of government stimulus, making consumers there more cautious about spending.
But more recently, the Chinese government has conveyed positive signals to address some of the economic challenges. It has pledged targeted measures to stimulate consumption, create jobs, and manage property risks, which marks a policy shift towards prioritizing economic growth.
So as we can see, the investment landscape has changed significantly since the pandemic. The most notable difference is the wide range of options now available to investors. Recent interest rate hikes from global central banks have contributed to a more normal yield environment, in line with the interest rate environment that existed before the 2008 global financial crisis.
As a result, bonds have become a viable investment alternative beyond equities for the first time in over a decade.
On top of that, significant progress in the development of artificial intelligence (AI), including innovation like Chat GPT, has driven areas of equity markets, including the NASDAQ up over 30% year to date. This, combined with a positive macroeconomic backdrop, has been one of the primary drivers behind this year’s rally in equity markets.
By Generali Investments