Outlook 2023: Asian Investment - Treading a careful path back to stability and growth

The key dynamic in markets this year has been the relentless tightening in financial conditions, with Central Banks globally ongoing challenge of bringing inflation lower - with exception of China and Japan – leading to elevated volatility, and negative returns across majority of asset classes. Moderation of demand growth, improvements in supply chains, high inventories and tighter monetary policy are likely sufficient to bring inflation back towards central banks' targets over the next two years. We forecast inflation to moderate rapidly, averaging 5% in 2023 and back to 2% target in 2024.

For the remainder of this year and into 2023 the focus is increasingly shifting to calibrating the impact of tighter financial conditions on global growth. We expect it to display resilience heading into next year, based on the support of a healthy private sector due to excess savings, the unwinding of adverse supply shocks, signs of a slowdown in inflation and the lags in the monetary transmission mechanism. We forecast global growth levels of 3.1% in 2022, 2.2% in 2023 and 2.7% in 2024.

The degree of this years’ global synchronization and pace of interest rate hikes is one of the greatest on record. With the financial system adjusted to a low-rate environment, a period of higher real and nominal rates is bound to place stress on the system. Amid this backdrop, our central case is that US economy enters a mild recession in 2023, with the Eurozone in recessionary mode by the end of 2022. The dynamics in emerging markets (EM) are more complex and EM vulnerabilities are rising unevenly, differentiated by region and country. Across most of Asia, for example, the re-opening impulse is fading as we enter 2023, and subsequently economic growth is likely to moderate.

China may prove to be counter-cyclical to the global growth slowdown; its ongoing easing of monetary policy and mild inflation offers the potential for growth – from an expected 3% in 2022 to 5% in 2023, assuming the reopening impulse materializes. Investor concerns about the housing market downturn, de-globalization, technology restrictions, private-sector policy and aging population will keep China's potential growth in focus beyond the long-awaited reopening excitement.

Looking at the investment landscape more broadly, the result of global investors fleeing almost every asset class this year is a decade-high amount of cash sitting on the side-lines. This might result in support for risk assets in 2023. Yet until the timing of further growth weakness is clearer, a trading environment is likely to be more prevalent than trending one. However, until the timings of further growth weakness are clear, investment environment may stay more of a trading one than a trending one, with slower growth, still elevated inflation and higher yields favouring bonds.

Any additional adverse shocks could cause protracted and deeper domestic recessions. Persistent inflationary pressures bring risks of policy miscalculation and overtightening of financial conditions. Further, financial markets stability is susceptible to fiscal policy acting in cross-purpose with monetary. Bank of Japan possible removal of the 10yr yield target, puts markets at risk of a rapid rise in global term premia. Politically, escalation of the war in Ukraine, with potential increased tensions in the European energy market are skewing risk towards a more severe downturn in Europe. China's zero Covid policy management and its economic recovery remain a key headwind, for growth in Asia, and globally.