The Blackrock Investments Institute published a review for the coming year in the financial markets under the title: ‘Why will 2023 be different?’.
Blackrock economists focus on three key changes that will affect 2023: “First, developed economies will face a recession. Second, we see central banks in developed countries stopping interest rate hikes as the economic damage becomes clearer. Commodity inflation is expected to fall sharply as commodity spending reverses direction. However, “We do not expect interest rate cuts while inflation remains above policymakers’ target targets. Third, the reopening of China and domestic consumption in China will drive global growth while advanced economies grapple with recession,” Blackrock economists wrote. “We prefer stocks in developing markets over developed markets and are positive about high-rated credit.”
Blackrock states that in 2023 the consequences of the sharp interest rate hikes in order to fight inflation will cause a recession, unlike the consequences of last year’s interest rate hike. “We are already seeing evidence of the damage of the interest rate increases in most parts of the economy, which are sensitive to interest rates, for example in the housing sector. The increases have a delay in their effect on the market which will cause a stronger economic damage than the energy crisis in Europe and an effect on consumers in the US who will burn their savings.
“We think that the recession will push the central banks to stop raising interest rates and this will be the second significant change in the economy. Inflation is expected to decrease while consumer spending in the US changes direction from goods to services, which will drag down the inflation on goods. However, labor shortages in the service industries are expected to prevent service inflation from falling significantly. Therefore, we are not expected to see the central banks cut interest rates in order to pull the developed economies out of recession,” they wrote in Blackrock.
At Blackrock they add, “We see the central banks maintaining the high interest rates for a longer period of time than the markets’ expectations due to a number of long-term structural reasons, the demographics changing with the aging of the population, pragmatism at the geopolitical level and the transition to zero carbon emissions.”
As for the third significant change – the opening of China, Blackrock states: “China is consistently removing the Corona restrictions. We estimate that its economic growth will reach over 6% in 2023, which will dampen the global slowdown as the recession hits the major developed economies. However, we It is seen that the growth of the Chinese economy will be inhibited to some extent due to the decrease in demand for products exported to the USA since the American market is channeling the expenses in the direction of services. We do not expect the level of economic activity in China to return to pre-coronavirus levels, even when local activity resumes. Growth in China is expected to return to the levels that characterized it in recent years after the economic restart enters a normal course.”
In conclusion, Metaini at BlackRock, “Following the three changes, we continue to maintain a very defensive view. In our view, the profit expectations of companies for 2023 still do not fully reflect the recession that we foresee in the developed countries. This is why we are underweight on stocks in developed markets. We Ready for a more positive turn in stocks in developed markets when a larger part of the damage we expect to the economies will be reflected in pricing or when our risk assessments for the market improve.
“China’s replacement of the US as the generator of global growth supports our preference for emerging market stocks, including Chinese stocks, over their developed market counterparts. In the bond worlds, we see more attractive opportunities in investment-grade credit, US collateral-backed mortgages and short-term government bonds. We remain underweight long-term nominal government bonds because they do not, in our view, reflect yield, while investors demand A higher premium over the long term, and do not compensate for the risk of holding them at a time when inflation is persistent and interest rates are high,” they wrote in Blackrock.