Since the start of the year, the prognosis has been neutral to negative among market watchers divining the direction of the economy and hence the markets, but some market watchers are wondering if the US Federal Reserve has over-tightened.
The International Monetary Fund is expecting global growth to come in below the 3% threshold it uses to define global recessions. “A downturn of this magnitude — excluding the Covid shock and the global financial crisis — could make 2023 the worst year for global growth since the 1980s,” notes Manulife Investment Management.
Manulife IM is expecting most advanced economies to slip into recession. “The US will face the lagged impact of the US Federal Reserve’s aggressive tightening. Economic weakness will be particularly pronounced in interest-rate-sensitive economies such as Canada, Australia, New Zealand, and the United Kingdom. In Continental Europe, the growth drag will predominantly stem from particularly large negative terms-of-trade shocks. Meanwhile, slowing final demand from advanced economies, elevated inflation, and a still-strong US dollar are likely to morph into material headwinds for emerging markets,” Manulife IM says.
China isn’t going to be spared either as its exit from zero Covid is likely to be “bumpy”. In addition, its property sector continues to struggle, and external demand could be weak.
On the other hand, Manulife IM’s base case is that “the looming negative demand shock is sufficient to see growth concerns overtake fears about the inflationary backdrop”. If so, central banks could turn dovish and start easing in 4Q2023.
“This is consistent with current market pricing and the historical tendency over the past five decades, where rapid and substantial rate hikes have tightened financial conditions so quickly that the subsequent growth slowdown prompted a sharp turnaround in the Fed cycle from tightening to easing,” Manulife IM adds.
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If so, markets usually move around six months ahead of fundamentals. Technically, the Straits Times Index (STI) formed a shooting starlike pattern on the candlestick chart on Jan 9, when the index rose to a high of 3,325 but closed at its low of 3,305. Unfortunately, the closing price is near the breakout level of 3,306, an area that has been tested four times and is likely to pose significant resistance.
If technical analysis theory is to be believed, the STI would only be able to break out of its strong resistance sometime in 2Q2023, which is six months ahead of 4Q2023 should central banks, and the Fed in particular, start to ease.
Ironically, the rate hike cycle has been beneficial to local banks, in particular, DBS Group Holdings as the uplift in net interest margins lifts earnings without the bank having to put up additional capital for growth.
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On the other hand, in a rather sobering report on Jan 2, JP Morgan points out that Singapore banks are a harbinger of asset quality issues for the region. “The sector should range-trade on valuations and dividends before NPLs (non-performing loans) lead to a drop in stock prices later in the year,” the JP Morgan report says.
“We hold neutral on DBS, which starts looking interesting below $33,” it adds. At $33, DBS would be trading at 1.36x its estimated 2023 book value, and at 7% based on a new, higher dividend. Analysts are expecting DBS to raise its dividends in its next results announcement. Technically, DBS formed a shooting star on Jan 9, and its impact on the STI was such that the index followed suit. For DBS, the resistance barrier is in the $35.90 to $36 range.
