WeeklyWatch – Markets halt worldwide as investors assess recession risk

24 January 2023

Stock Take

Recession news from World Economic Forum

Though many of us have tried to remain positive in the face of a recession, it seems worries have reached their peak and resultantly paused the progress of global markets last week.

It seems that focus may be shifting according to observers. Where the narrative was once all about the hiking cycle of central banks’ rates, more attention is now being placed on the slowdown of market growth.

World leaders gathered at the World Economic Forum’s annual meeting in Davos last week after a three-month hiatus. The results of a survey of senior economists conducted prior to the event overshadowed some of the excitement, as they showed that two-thirds of the economists anticipate a global recession this year.

The leaders attending the conference, though, seemed to be in a more optimistic frame of mind. Gita Gopinath, Deputy Managing Director of the International Monetary Fund, hinted that the fund might raise its 2023 growth predictions as a result of recent encouraging data from the US and Europe. Germany’s chancellor predicted that the largest economy in the eurozone would avoid a recession, and the think-tank ZEW said that investor mood had improved for the first time since Russia’s invasion of Ukraine.

Future of the UK economy remains bleak

The FTSE 100 Index was approaching its 2018 record high at the start of the week. European markets were getting close to a nine-month high thanks to rebound hopes in China and decreasing inflation worries. By the end of the week, however, disappointing retail sales figures and reports of declining consumer confidence served as a reminder to investors of the UK economy’s bleak outlook.

Bank of England Governor Andrew Bailey responded to the news that UK inflation fell to 10.5% in December by speculating that it may be a sign that “a corner had been turned” and that inflation might be on an “easier path”. But according to the BoE, the UK is still set to experience a long, shallow recession. According to Bailey, the risk premium on UK assets that Liz Truss’ budget programme had created last year has “pretty much gone”, but confidence is still shaky.

Interest rates were expected to increase to 6% following the turmoil. But markets now anticipate a 4.5% peak and a base rate increase from the BoE to 4% on 2nd February.

More job cuts and a weak dollar in the US

Google’s parent company Alphabet followed Microsoft and Amazon’s lead and announced major job cuts in the US last week. As the hypergrowth the sector saw during the pandemic period slows down, it is predicted that over 200,000 industry employees have lost their jobs since the start of 2022.

On Wednesday, the dollar experienced its biggest plunge since the aftermath of the global financial crisis and touched a seven-month low as larger-than-anticipated drops in US retail sales and producer prices fueled rumours that the Federal Reserve might loosen monetary policy. The Fed is becoming increasingly more likely to shift to 0.25-point increments. Columbia Threadneedle suggested:

“We currently have traders putting a five per cent chance on a 0.5 percentage point increase at the next Fed meeting. It’s not often you get that kind of certainty.”

The dollar’s decline has increased the value of developing market stocks. The cost of importing commodities into developing countries has been reduced because of a weaker dollar, which also lowers the cost of servicing debt in the currency. The MSCI Emerging Markets index has increased by 8.3% this year, compared to a fall of 22% in 2022.

Another factor has been the quicker-than-expected reopening of China’s economy following the COVID-19 lockdowns. The economy’s near-term outlook has undoubtedly improved, and industries that cater to consumers stand to gain the most from the built-up demand.

China’s market recovery

Data released last week revealed that China’s economy fared better than anybody had anticipated in the fourth quarter; GDP stalled at 0.0%. However, growth of 3% over 2022 represented the worst economic slump for China in close to 50 years.

According to a Reuters poll, growth will rebound to 4.9% in 2023. A robust recovery in China might ease concerns about a global recession, but it could also aggravate inflationary problems at a time when policymakers are just beginning to control them.

Nevertheless, this year’s improved growth is not expected to signal the end of the structural slowdown that started more than 10 years ago. According to data from the National Bureau of Statistics, China had its first population decline in 60 years last year.

Artisan Partners emphasised the need for patience from investors, pointing out the difficulties of the previous year and the uncertainty of 2023. They said:

“Rising interest rates, the war in Europe and the prospect of a recession loom over the stock market, keeping stocks cheap.

“Turns in the market come very quickly, out of nowhere, and often when things feel the worst. Wars end. Inflation ebbs. Recessions come and go. Ultimately, valuation is the best measure of future returns. We have added aggressively to our holdings in this past year at attractive valuations. We expect to be very well rewarded for buying when others are selling.”

Wealth Check

From high inflation rates and rising food and energy costs to a possible recession, you could be feeling pressure to make short-term financial sacrifices in order to fulfil your immediate demands given the present economic situation.

Stopping pension contributions

For the many households that are struggling to make ends meet, it might be tempting to choose not to pay pension contributions for a few months.

This may seem to make sense at first glance. After all, it can take years or even decades for your pension contributions to start paying off. So it could seem to be a good alternative in the short term if financial pressures are high and you’re having trouble covering basic household expenses.

For many though, it will be a matter of postponing the discomfort. Because even while cutting back on your contributions or ceasing completely can make it simpler to fulfil certain short-term demands, it’s a decision that might have a big influence on your standard of living later in life when you’ll have fewer alternatives.

Pausing pension contributions

Contributions can be paused, but doing so has a number of drawbacks and might not be as beneficial as it first seems.

For starters, you no longer receive the tax break that the government provides on such donations. And the top-up contributions that many businesses make to employee pension plans may also be something you’re losing out on.

Also, keep in mind that the money you put toward a pension grows thanks to the power of compounding. This is what’s known as a snowball effect, which means any gain in the investments stored in your pension goes on to produce its own growth. If you completely cease making contributions, not only will you lose the money you have already paid in, but you might also lose out on a sizable amount of investment growth.

So, what should I do?

You run the risk of making choices now that have a detrimental impact if there are no steps put in place to lessen their long-term impact, especially in the current climate. That’s why the best thing you can do when making changes to pension plans is consult your financial adviser.

Your financial adviser can develop a plan for you that includes some flexibility to help you deal with short-term challenges, like a significant increase in your daily living expenses, and help you to consider other important decisions.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

In The Picture

The main topic of economic discussion last year was inflation. However, as 2023 progresses, experts now predict a significant decline. The below image shows the median of economists’ forecast for headline CPI (% change, year-on-year).

Source: Bloomberg, BLS, Eurostat, ONS, J.P. Morgan Asset Management. CPI is consumer price index. Guide to the Market – UK. Data as of 30 November 2022.

The Last Word

“China has become older before it has become rich.”

– Yi Fuxian, a demographer at the University of Wisconsin-Madison, reacts to the Chinese population falling in 2022.

Artisan Partners and Columbia Threadneedle are fund managers for St. James’s Place.

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SJP Approved 24/01/23