China reopening hopes to safeguard global economy; inflation a “poison”. As world leaders met and concluded the World Economic Forum in Davos, discussions were centred around recession, China reopening, global debt pile, inflation, and climate issues. While making a call on recession is tricky, sentiments were unanimously more upbeat than in the same meeting last May when the Russia-Ukraine crisis started. China’s reopening hopes and an impending end to the global hike cycle this quarter also cushioned earlier global hard landing fears. Despite the cyclical hopes, frustration was apparent over structural issues, namely deglobalisation, and the lack of real climate actions.

Between a rock and a hard place, central banks raised concerns about inflation risks which they are determined to “stay the course” (on the fight against it), while feeling more hopeful about the global economy. Here are the key takeaways:

1. A mild recession
   CEOs of major global banks remain optimistic about a “mild” recession which is going to be shorter and shallower than previously thought. Despite ongoing geopolitical and economic uncertainties, the business environment remains resilient – unemployment is low and companies are still investing. China's reopening after a multi-year Covid-related shutdown would help jumpstart the global economy. Gloom about the economy was seen in the rear-view mirror – confirming our view that many negatives have already been priced in.

   Figure 1: A recession can be avoided
   
   
   

2. Central banks to ‘stay the course’
   Calling inflation “poison”, the message from central bankers present at the meeting, including International Monetary Fund and European Central Bank chiefs, was that rates are likely to go higher as inflation is way too high by all accounts, and they shall stay the course on fighting inflation.
   We continue to look for two more 25 bps Fed hikes by 1Q before pausing. And if it does pause, a soft landing shall thus become more likely. A Fed pivot is unlikely this year as inflation remains a bigger concern than growth risk, in our view.
3. Oil price
   Oil majors are optimistic on oil demand as China’s reopening is seen as a major boost to oil demand as it was down significantly last year during China’s lockdown. Near-term boost to oil prices include US SPR refilling to start in February.
   Meanwhile we forecast oil prices at around USD80-100 in 2023. This should support earnings and cashflow for the European oil majors to continue buybacks and pay high dividends.

   Figure 2: Oil price to stay supported with upside risks
   
   
   

4. Warmer China ties
   China’s Vice Premier Liu He’s constructive meeting with US Treasury Secretary Janet Yellen in Davos was a step toward improving dialogue, with plans announced for Yellen to visit Beijing later in the year. We see this as a sign of thawing US-China relations – a major catalyst for better China equity performance this year. Meanwhile, France says the European Union should engage China and not oppose it, suggesting that China will be back on the world stage.

   Figure 3: China equities index trading below pre-US/China trade war levels
   
   
   

5. CEOs signal M&A ramp up
   CEOs of large banks and corporates signaled that the pace of mergers and acquisitions (M&A) is likely to ramp up despite persistent uncertainty about the outlook for 2023, taking advantage of more sensible valuations to improve on productivity and invest in future growth. Indeed, our analysis concludes that large quality companies have strong earnings and cashflow to take advantage of current market conditions to boost investments and acquisitions for future growth. Valuations of some of these companies also look enticing for private equity and activist funds as a lot of value can be harnessed at these levels.

What it means for your portfolio

The investment environment is likely to be challenging on the back of recession and inflation risks, but windows are open to be engaged in the long term, in a multi-asset portfolio of equities and bonds. We reinforce our view that portfolios should stay invested based on the following:

• Stay engaged in bonds particularly Investment Grade credit with 3-5 years maturity. It would take at least 200 bps of rate hikes by the Fed for this asset class to start registering negative return. Given our view of terminal rate at 5%, this will be a good risk-reward.
• Stay engaged with equities. Growth and Technology equities as part of our barbell strategy make sense as they were the worst hit in 2022 from fear of rate hikes, so the expected slower trajectory this year would act as a tailwind.
• Stay with Gold as a risk-diversifier and hedge against black swan events to add overall resilience.