Coming into 2023, analysts remain divided in terms of where the global economy is headed. Many agree that a recession in major developed countries is looming, but the severity and spillover effects to the global economy has been largely debated. We believe this disparity can be attributed to conflicting economic data, such as declining consumer demand clashing with a robust labour market. This has led to a precarious situation where it is uncertain if the US Federal Reserve (“Fed”) has already overtightened their monetary policy.
With our current read on the market, our base case is still a recession in developed countries, but we do not think that a severe recession is in store and could see economic data bottoming out before the end of 2023. There have been concerns on China’s reopening causing an inflation spike, however we believe that with the removal of zero-COVID policies, supply chains should ease and balance out with demand.
Towards the end of the month, tensions between the US and China rose again due to the discovery of a Chinese surveillance balloon over the US’ military zones. This caused relations to sour as US diplomat, Antony Blinken, has postponed his visit to China indefinitely. We expect the current status quo of heightened geopolitical risk to continue and cause increased uncertainty in financial markets.
Over in China, clear indication of regulatory easing was seen in their technology industry, where a total of 88 new video games were approved in January, after 128 games were approved in December. Ant Group’s consumer finance unit also received approval from regulators to increase their registered capital by more than double, a relief for the company that has been under regulatory scrutiny since its initial public offering was abruptly halted in 2020.
General market expectations seem to be pricing in a mild recession, with markets expecting possible interest rate cuts before the end of this year. This is despite the Fed continuing to message that they will maintain their hawkish stance as long as inflation stays high. This mismatch between the Fed’s hawkish stance and the market’s dovish expectations on interest rates could be a potential risk for developed markets in the near-term, in our view. On the back of this uncertainty, we stick with our thesis to remain more constructive on Asia due to the expected recovery from China’s reopening.