Market Outlook - March 2023

As more economic data is released, we believe that the severity of the recession in the US could be deeper than previously expected. For example, retail sales on a nominal basis in the US are said to be robust by media coverage, however it is worth mentioning that real retail sales have been stagnant since mid-2021. This implies that growing retail sales is a result of price inflation, rather than strong consumer demand. In addition, household savings as a percentage of disposable income and money supply growth in the US are currently at similar or lower levels than in 2008.

Notable developments have occurred at the time of writing, starting with the collapse of a few regional banks in the US and significant concerns on Credit Suisse’s financial standing. We believe the collapse of the regional banks was largely due to the aggressive rate hikes by the Fed, leading to worsening capital positions. We are monitoring the situation closely as this is a classic case of a bank run, which could pose a serious threat to the global financial system.

Our take is that the situation should be under control as the Federal Deposit Insurance Corporation in the US have announced that they will insure all customer deposits for Silicon Valley Bank in a bid to prevent further panic. Additional funding was also made available by the Fed via the creation of a new Bank Term Funding Program, which we believe will prevent any further liquidity crunches. For Credit Suisse, the risk has also been contained, in our view, as they will be acquired by UBS, with additional funding provided by the Swiss National Bank to UBS as part of the deal.

Towards the end of the February, China released a 12-point proposal regarding the Ukraine crisis. The initial response from both Russia and Ukraine has been positive as their leaders are planning to have further discussions with China. This is another development that we are watching closely as it could free up the last major supply constraint globally. We expect commodity prices to normalise further if China is successful in brokering a peace deal between the two countries. This could also improve China’s credibility greatly, leading to better standing in the global political scene. We have already seen China’s reliability in foreign relations after they successfully brokered a reconciliation between Saudi Arabia and Iran. These events may be crucial for China in an increasingly divided world between the US and China.

China’s GDP growth target from their two sessions was 5.0% year-on-year. This is considered a modest target compared to historical targets, signalling economic challenges for the global manufacturing hub. Despite this, the long-term outlook for Asia still outshines that of Western countries from a relative standpoint. Over the near-term, we will continue to monitor the major issues highlighted to ensure that we are safely positioned in case of a systemic risk.