Money/Credit/Debt

An important annual event is when long-time client Mr. X visits BCA strategists at the end of each year to talk about the economic and financial outlook and a write-up of the discussion is published as our Annual Outlook report. Recently, BCA’s former Chief Economist Martin Barnes had the pleasure of a chance encounter with Mr. X at an airport lounge, and this report is an edited transcript of their conversation.

First Republic Bank’s earnings report showed how its struggles have exaggerated the perception of other banks’ distress. Ex-FRC, the banking system appears to be coping with the post-Silicon Valley Bank turmoil pretty well.

Government financing vehicles (LGFVs) are a key component of China’s credit system. LGFV bonds make up a 40% share of the onshore corporate bond market, and loans to LGFVs make up 20% of total loans. LGFV debt-servicing capacity is very weak. What are the ramifications of all of these for Chinese economic growth and financial markets?

In this week’s report, we look at the current de-dollarization discussion within the context of the USD’s near-term cyclical outlook, and whether it warrants a bullish or bearish stance.

Investors and regulators would be foolishly complacent if they didn’t consider the possibility that the banking turmoil could reduce credit availability and slow economic activity, but the most recent data suggest that the aggregate banking system is bouncing back nicely.

A benign disinflation is probable during the remainder of 2023. Unfortunately, just when most people become convinced that a recession has been avoided, a recession will begin.

No, the secular rise in geopolitical risk has not peaked. EU-China trade ties underscore the multipolar context, but this multipolarity is unbalanced, as the US has not reached a new equilibrium with its rivals. While the second quarter is murky, investors should stay defensive this year on the whole.

Eventually South Africa will do its macro rebalancing the least painful way: via adjustments in nominal variables such as prices and currency, rather than in real variables such as jobs and incomes. That entails a much weaker rand in future.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.

We think the banking turmoil set off by Silicon Valley Bank’s failure will prove to be less than it’s been cracked up to be and that it will not derail the near-term equity we expect.