Key convictions 3Q23
Preview
Looking ahead with cautious optimism
The period since the onset of Covid has been tumultuous to say the least. Last year, rising inflation drove markets and policy, stoking fears of recession. Now disinflation is well underway, uneven yet welcome, as central banks appear nearly done tightening—though risks remain of having gone too far as some cracks emerge. Stress persists in banking, but immediate disaster seems avoided, as systemic risks have abated. US and global growth are broadly slowing following the initial post-Covid rebound, but the former may skirt recession if policy steadies.
Supply chains have improved in China and a weaker US dollar aids other nations, especially developing ones hammered when the flight to safety bid the dollar up and Fed rate cuts sent capital home. Yet central bankers often cannot help reacting to each data point, keeping volatility high and trust in their judgment shaken when actions follow words but consequences prove still some ways behind.
Global growth is broadly downshifting but is aided by factors such as the reopening of supply chains in China and a weaker dollar, which bodes well for EM. But central bank overtightening is still a meaningful risk. Central bankers talk about the long and variable lags that need to be considered but they often can’t help overreacting to monthly inflation prints. This will continue to keep volatility and uncertainty high. Even with this backdrop, we are encouraged by the higher yields in fixed-income and our view is that investors are best served by higher-quality credits.
WHAT ARE THE RISKS?
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