The big swings in the global economy are abating. Unlike after the shocks in the past three years, the way forward looks more stable. This does not mean that there is anything resembling a boom ahead. But the past limbo of not knowing what the economy is going to do next – tanking or bouncing back – is less of an issue.
Instead, economists are busy tweaking their numbers to capture the latest changes, most of them minor ones. For the US, this means looking at the rates biting into the economy and trying to spot the ‘big thing’ that could derail the economy. For the time being, we cannot spot it either. The commercial real estate market is not big enough for that, and neither is the crisis in the regional banks. Granted, it remains a close call whether a recession looms. In fact, we frame it as the closest call possible: 50:50.
In China, the reopening bounce is softening as well, and we cannot spot many levers policymakers can or are willing to pull to add fuel to the fire. In Europe, by contrast, the situation appears better than most thought last year. All in all, then, we still think that summer 2023 will be – like most of the year to date – about going east for investment opportunities.
Improved returns on Japanese equity — but no major trend in sight
Japan is back on investors’ radar screens and has room for more exposure. The country was late in reopening and is now experiencing a post-pandemic recovery similar to what the West enjoyed earlier. We expect the central bank soon to introduce that will support the yen, providing an additional source of return for USD investors.
Global investors picked up their interest in Japan after legendary value investor Warren Buffett increased his stakes in five major trading houses last month. We share Buffett’s view that the quality names are modestly priced. However, high return on equity is the real attraction of those companies and, while there have been encouraging examples of improved returns on equity, they are not enough to call a trend. We maintain a Neutral rating but advocate select Japanese quality stocks.
Correction in copper prices provides a buying opportunity
Staying in the East, China’s reopening in January pushed prices on the industrial metal markets to multi-month highs. Fast-forward four months and the rally has reversed, the prices having returned to pre-reopening levels. We did not spot a change in fundamentals justifying either the reopening rally or the current correction, and regard this as a sentiment cycle. Especially for copper, we believe prices are now much more aligned with fundamentals and we reiterate our long-term positive view.
From the middle of this decade, the copper market should experience slowing mine supply growth at a time of accelerating demand growth from the energy transition. We thus take the current correction as a buying opportunity. We recommend taking exposure via copper futures or a futures-based copper index, which due to the low cost of carry are well suited also for long-term buy-and-hold investors.
US economy: Is a full-scale recession looming?
We assign a 50% probability to a recession in the US economy in next twelve months. The risk of further Fed rate hikes and tighter credit conditions increase this probability, however, we see an equally large probability that a GDP decline in the coming quarters will happen without evolving into a recession. The comparatively low level of overinvestment and overemployment in the economy makes a mere growth setback, followed by a resumption of investment, consumption, and hiring, a 50% probability in our view.
US households are flush with wealth and falling inflation is bringing real income growth back into positive territory. Business investment is also doing much better than depressed business sentiment and rising financing costs would suggest. In our baseline view, we expect US GDP to contract in both Q1 and Q2 2024, before returning to growth in the second half of 2024.