“Recession is very much a big risk for this year for the markets. It will weigh on asset markets in general. One talked about equity impact and clearly equities are going to struggle in an environment where earnings are going to come under pressure. We are not done yet with policy tightening from the Fed and other major central banks. Some pain in markets is likely in the next several weeks and months,” says Mitul Kotecha, Head of Emerging Markets Strategy, TD Securities
Recessionary fears could potentially return to haunt global as well domestic investors. How big a threat or a worry is it and do you see us already on that path?
We are on the path towards recession. It is a worry and clearly the US and Europe are sliding towards recession. It is probably going to be a deeper one in Europe. China growth concerns still remain paramount and clearly the rapid opening up of China’s economy and dismantlement of Covid restrictions created a lot of pressure on the economy in the short term.
There is light at the end of the tunnel but at least in the near term, we have seen the impact on oil and other commodity prices. There are concerns that it is impacting growth prospects. So recession is very much a big risk for this year for the markets. It will weigh on asset markets in general. One talked about equity impact and clearly equities are going to struggle in an environment where earnings are going to come under pressure. We are seeing that now and we are still at a time when the Fed continues to hike rates.
We are not done yet with policy tightening from the Fed and other major central banks. Some pain in markets is likely in the next several weeks and months.
As we look at the way forward, are things going to be foggy and hard to call or is there going to be light at the end of the tunnel where in 3-6 months, we would know whether it is inflation peak or a recessionary concern?
We would know some things, we are approaching the peak in inflation, if we have already passed it. Inflation on a sequential basis is now reducing and that is good news. But it is reducing from a very high level and even in the US, it is going to be some months before the Fed gets inflation back to its 2% target, if not at all this year and that will involve job losses and I think the jobs market is still tight.
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On Friday, the US jobs numbers will be out and we are looking for a pretty strong outcome. So the sense here is that there is still some way to go. I think inflation is a good sign. Things are easing on the policy front. We still think there is upside momentum on rates. The Fed FOMC minutes overnight highlighted that the Fed still needs to hike somewhat more and we could get a 5.25-5.5% on the terminal rate in the US.
Where the uncertainty lies is going to be the death of economic weakness and that is where the fog is. It is going to be how far the US economy weakens, how much Europe weakens and how quickly does China rebound. These are big unanswered questions that may take some months for clarity to emerge. In the second half of the year, we will get a much clearer picture. The first half is going to be a foggy one.
Is 2023 going to be a lean patch for equities at large?
Yes, it is definitely not going to be an easy path for equity markets. Any risk asset is going to find it difficult this year when there are so many headwinds and we have not even talked about the ongoing war in Ukraine. At the same time, there are worries about China’s growth and Covid in the near term. Some light on recession prospects, higher rates, earnings pressure are likely to intensify and it is going to be challenging for equity markets.
We have had a sharp selloff particularly in the tech stocks and that is reflecting some of that weakness ahead in earnings. It does not seem as if all the pain is done yet and so equities and all risk assets in general are going to have a very rocky road. The one asset class that may benefit this year is bonds and after a tough year last year, it does look like a lot of investors are moving back into bond markets. We may finally see that 60:40 allocation come back into play for equities and bonds.
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