With slow inflation and high unemployment, China risks self-reinforcing deflation until it acts decisively. Meanwhile, we’re shifting our portfolio away from likely casualties and toward potential opportunities.
We’ve made offsetting upward revisions to US growth forecasts for 2023 and downward revisions to China. This has led us to reallocate our Global Investment Committee (GIC) equity positions within global markets.
As noted last week, China’s outlook appears increasingly dependent on a change of approach from China’s policymakers. The US, meanwhile, is seeing a virtuous cycle of demand strength outlasting contractionary forces. (This can be seen in falling business inventories.)
With Fed Chairman Powell hawkish and the US dollar rebounding, we have moved to add an Equal Weight S&P 500 Index position at the expense of China, Hong Kong and Brazil shares. This avoids adding much further to US large cap tech shares trading at 36X forward EPS estimates. In fact, the S&P Equal Weight Index is trading at the largest valuation gap to the market cap-weighted S&P since 2010.
Nevertheless, we’d still expect a slowdown to come for the US, particularly for US labor markets in the coming year. Eventually, bearish bond investors will cover record high short positions in US Treasuries much as equities investors did in early 2023.