Quarterly Market Outlook - 4Q 2023

1. Global growth is facing a number of headwinds

The global outlook is being troubled by rising rates, oil prices and the U.S. dollar, resulting in investor risk aversion. The U.S. faces a consumer-led downturn, although corporate balance sheet strength should ensure it is only mild.

2. Inflation is decelerating, albeit slowly, and will likely end the year above target

Global inflation continues to recede, but deep economic slowdowns may be required to reach global central bank inflation targets. Higher oil prices, if sustained, also threaten to undermine anchored inflation expectations.

3.Global monetary tightening cycles are nearing the end, but rate cuts are not imminent.

As long as economic growth remains above trend, inflation may resurge, forcing continued caution amongst policymakers and delaying policy rate cuts.

4. Equities face limited upside as a 2024 soft landing is already priced in.

Spiking bond yields are challenging the equity market’s soft landing assumption. With limited prospect of an upgrade to earnings expectations, equity market returns are likely to be muted—particularly until bond yields peak. 

5. The global bond sell-off is disruptive but adds much-needed income to fixed income.

A nuanced approach is required in fixed income. Higher for longer may extend the bond sell-off, but a modest economic downturn means credit spreads can remain fairly tight. Bonds now may generate meaningful portfolio income.

6. Alternatives may provide important diversification against traditional equities and fixed income.

Until bond yields peak, REITs may remain under pressure. Commodities’ strong performance may be sustained. While the less bearish economic outlook suggests infrastructure exposure is less crucial, inflation mitigation is still required. 

Source: Principal Asset Management Company (Asia) Ltd.


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