Mega Themes

Europe’s domestic economy continues to surprise to the upside, can small-cap stocks do the same?

Highlights Market expectations for Fed rate cuts later this year reflect either an extremely mild US recession, or a nonrecessionary scenario in which inflation falls rapidly back toward the Fed’s target. In the case of a true recession, even a…

Heading into a black hole, you pass a point of no return known as the ‘event horizon’ after which your impending oblivion is sealed. US recessions also have an event horizon, which we are fast approaching. We reveal a leading indicator of this event horizon, and what it means for investment strategy.

Global investors should sell Chinese assets on strength this year and diversify into other emerging markets. American investors should limit China exposure. Short CNY-USD.

Hopes of a soft landing for the US economy will intensify over the coming months, allowing equities to rally. However, even if an equilibrium of high employment and low inflation is reached, it will be difficult to keep the economy there. Investors should remain tactically bullish on stocks but look to turn defensive in the second half of 2023.

In EM ex-China, growth will continue decelerating. Some economies will experience an outright recession, while most will have a growth recession. Nearly every single economy will experience a cyclical drop in inflation (with the exception of Turkey).

China’s re-opening – powered by the fiscal and monetary stimulus required to achieve at least 5% real GDP growth after flattish 2022 growth – and a weaker USD will catalyze demand growth this year and next, lifting global oil consumption by close to 2mm and 1.7mm b/d in 2023 and 2024. We lowered our Brent forecast slightly for this year to $110/bbl, and expect 2024 prices to average $115/bbl. WTI will trade $4-$6/bbl lower.

China's reopening is much more positive for the Chinese economy than it is for the rest of the world, as it will boost its domestic service sector activity and consumer spending much more than the industrial economy. A slowdown in Chinese industrial activity will put downward pressure on its demand for raw materials and energy, helping the world avoid another spike in inflation. Upgrade Macau casinos to overweight as the key beneficiaries of reopening. Off-shore TMT and bank shares face structural headwinds.

Investors should bet against the global rally in risk assets and maintain a defensive positioning until recession risks verifiably abate.

Investors should bet against the global rally in risk assets and maintain a defensive positioning until recession risks verifiably abate.