SUMMARY
With an impending compromise on the debt ceiling, an improving outlook for Southeast Asian equities, an updated economic forecast and more, we have put together five insights that we believe will drive markets in 2023.
The Debt Ceiling: If a compromise on the debt ceiling is reached, the negotiations will likely result in more fiscal tightening and may help the Fed achieve its anti-inflationary goals, but at the cost of reversing policies that boosted personal and corporate income over the past few years.
Citi Global Wealth Investment’s updated economic forecast: While the “strong” economy and Fed policy appear to be on a collision course, pent-up demand and the positive inertia of the post-Covid rebound have led to a stronger US economy than we anticipated through early 2023. We’ve revised our 2023 growth forecasts upward, but caution that this will just defer the economic downturn and recovery.
A Narrow Rally Led by Mega-Caps: Of the $5.5 trillion in global market appreciation so far this year, 52% can be attributed to just 10 companies. Nonetheless, gains so far this year are just another example of the folly of market timing.
Smaller Stocks Look More Attractive: As a result of small cap stocks’ tepid 2023 performance, valuations have improved, with profitable small and midcap (SMID) names now trading at 14x trailing 12 month earnings, a 26% discount to their larger peers. We see this as one of several opportunities that will likely enter portfolios in the near term.
An Improving Outlook for Asian Equities: Following a post-Covid reopening in most of Asia in late 2022, an economic recovery led by service industries is well underway. Beyond China, India and parts of Southeast Asia, including Thailand and Indonesia, are leading the world in terms of manufacturing and supply chain expansion. Although China’s economic recovery has been uneven, we expect growth in China’s onshore equity market.
