Global recession? Look forward to a good stock market rally instead
- Are the gloomy forecasts about the global economy justified? The recovery of the US, Chinese and European economies, inflation easing and the glut of liquidity from previous crises should be enough to buoy investment for years
We are in the midst of a full-blown bull market for global stocks. The bottom was reached in mid-October and the outlook for global recovery is much more sanguine than the bears would have you believe.
Global liquidity levels remain high, the appetite for risk is still strong and stocks should have the capacity for at least a further 20 per cent rally this year, on top of the 16 per cent gains already seen in the past three months.
Mind you, it’s sometimes difficult to see past the downbeat views from the major forecasting bodies, such as the World Bank and International Monetary Fund, which have shifted to more pessimistic outlooks for 2023 global growth.
Last week, the World Bank warned that we are perilously close to a global recession, anticipating that growth could drop to as low as 1.7 per cent this year, down from an expected 2.9 per cent in 2022, the third-weakest rate in nearly three decades.
Meanwhile, the IMF recently cautioned that up to a third of the world could be in recession this year. It’s a dramatic shift from its customary constructive spins in the face of tough conditions. But is it justified?
It is very likely that the benchmark Fed funds rate will hit 5 per cent in the next few months, but it is less clear how quickly interest rates might come down thereafter.
US consumer price inflation will be the big indicator, especially with clear signs that headline inflation topped out at 9.1 per cent last June and is already down to 6.5 per cent, based on the December 2022 data. By the Fed’s own forecasts from December’s monetary policy meeting, inflation is expected to average 3.1 per cent this year and fall to 2.5 per cent for 2024.
In other words, the Fed’s 2 per cent target inflation is in sight. No wonder the money markets are jubilant and stock markets are bullish.
Likewise, the European Central Bank has delayed plans to offload QE assets from its balance sheet until March. The glut of easy money and credit accumulated through global crises over the past 15 years have left global markets with more than enough liquidity to fund investment, speculation and trading activity for years.
With the prospect of the worst of the inflation crisis ending in 2023, interest rates topping out soon and the downturn in global economic confidence close to bottoming out, it’s no surprise investors are reading more positive writing on the wall and increasing their exposure to equities and risk assets.
Doing nothing or playing it safe is not an option after the disastrous run for stocks in 2022. For those investors who can see through the murky conditions and trust their instincts on recovery, 2023 looks like it will bear fruit.
David Brown is the chief executive of New View Economics