Macroscope | In 2023, investors must manage expectations of a Fed pivot and China’s reopening

Reports and presentations on the global economic and market outlook for the year ahead are rolling in. While the level of uncertainty has not been this high in decades, mainly because of what the International Monetary Fund rightly describes as “a unique mix of headwinds”, the forecasts come at a time of increasing optimism among investors.

Although the signs are tentative, open to interpretation and too uncertain to qualify as a catalyst for a broad-based and durable rally, they are sufficiently important for investors – who are desperate for good news and easily influenced by the slightest hint of policy easing – to entertain the possibility that inflation has peaked and that China is preparing to reopen its economy.

As 2022 draws to a close, hints from Chinese and US policymakers are moving markets to an exceptional – indeed excessive – degree. Beijing’s decision to ease some of the restrictions underpinning its “dynamic zero-Covid” policy and the Federal Reserve’s signal that the pace of interest rate hikes is likely to slow are the dominant themes in markets.

Since both factors will have a profound impact on economic conditions and asset prices next year, investors would be well advised not to overplay tweaks in policy and instead focus on the underlying issues that will determine whether the hoped-for shifts materialise.