2023 – Market recovery with bumps along the way
Reflecting on the closing of 2022, we note that the U.S. economy narrowly avoided recession, Europe's financial markets continuing to decline, and Asia showed signs of growth following the reopening of major markets after the peak of the Covid-19 pandemic. On the horizon for 2023 forecasted is weaker growth, higher inflation, and more Central Bank interest rate hikes.
In contrast to the U.S., the Euro area and the U.K. are most likely in recession given market signals. The reason for this is the larger and more drawn-out increase in household energy bills, which should boost headline inflation to peaks of 12% in the Euro area and 11% in the U.K., far higher than in the U.S. In turn, high inflation is set to weigh on real income, consumption, and industrial production.
In 2023, Morgan Stanley projects that the economy of the euro area will decrease by 0.2% because of the ongoing energy crisis and the tightening of monetary policy. It is anticipated that inflation will continue to be well above target throughout the rest of 2022 and into 2023, after surging to an unheard-of annual rate of 10.7% in October 2022.
Morgan Stanley predicts that global GDP growth would peak at just 2.2% in 2023, narrowly avoiding recession but being lower than the 3% growth anticipated for 2022 because to the excessive post-Covid consumer demand, bloated retail inventories, and the ongoing fight against inflation.
Corporate profits could do better than in previous downturns, if the recession is not severe or protracted, and the decrease in values this year offers a potential safety net. Since 1950, prices have peaked seven months before earnings on average. Therefore, a drop in earnings does not always suggest that stocks will experience a losing year in 2023.
We believe that in 2023, potential investment opportunities could materialize as markets adjust and start to normalize. The international economy is slowing down for several reasons, including high inflation and tighter monetary policy. We believe markets continue to overestimate where rates may go.
Inflation remained the No. 1 driver for the markets throughout the year with every successive upside surprise resulting in investors adjusting their interest-rate expectations higher and pressuring valuations. The headline consumer price index (CPI) hit a peak of 9.1% in June, a 41-year high, before starting to slowly ease over the past few months. The overshoot in inflation was first driven by a surge in oil and grain prices sparked by the unexpected war in Ukraine in 2022 but then price pressures broadened to services.
STOCK MARKET EXPECTATIONS
Stocks had a dismal year in 2022, even after recovering from their October lows, and market observers anticipate more of the same in 2023, at least initially. Investors have digested a lot of uncertainty right now, and that uncertainty should increase volatility in 2023, according to analysts, since the Federal Reserve plans to keep rising interest rates and the U.S. economy has not yet entered the long-anticipated recession.
While the equity markets may experience a decline in 2023, some industries may be able to thrive better than average. Growth companies have been negatively impacted by higher rates, but many valued firms have performed well, or at least not as poorly. Experts believe that is one area to keep an eye on in 2023.
Higher interest rates are bad news for stock prices. They increase the cost of capital, which discourages companies from borrowing and investing to expand their businesses. The bad news for investors is that earnings growth tends to stagnate. Additionally, discounted cash flow valuations are negatively impacted, which can harm high-growth stocks.
2022 has been a difficult year for stock values in general, but growth equities have been particularly badly hit by rising rates. In actuality, the Vanguard Growth ETF (VUG), which has a year-to-date total return of -27.8%, has severely lagged the S&P 500. Growth equities have generally outperformed value stocks since 2000 by a large margin.
Despite the decline in stock valuation growth in 2022, value stocks have largely remained up. In actuality, the Vanguard Value ETF (VTV)'s total return year to date has only been -1.7%. Investors will probably continue to look for relative safety in value equities if they are concerned about market volatility, geopolitical and economic uncertainty, and increasing interest rates.
ENERGY STOCKS AND THE RUSSIA-UKRAINE WAR
International equity markets have been severely impacted by high inflation and rising interest rates. The Russia-Ukrainian War-related global energy shortages aided the energy sector's unprecedented gains. The only market sector with positive year-to-date gains in 2022 is the S&P 500 Energy sector, which is up 70.3%. In addition, consumer staples, utilities, and healthcare are all down less than 6% year over year defensive market sectors with relatively solid profit outlooks.
European gas and oil prices have fallen from their highs from earlier in the year, and concerns about the near-term gas supply have subsided towards the end of the year. Demand concerns, however, are weighing on sentiment for oil. We do anticipate both markets to tighten once again in 2023, which naturally would imply higher pricing.
U.S. manufacturers' response to the year's higher price environment has been anything but impressive. In additional, it seems that this has given OPEC+ the confidence to reduce supplies without worrying about losing their market share. The U.S. crude oil supply is expected to average 11.8MMbbls/d in 2022, growing by less than 600Mbbls/d. While the supply is expected to reach 12.3MMbbls/d in 2023 after increasing by less than 500Mbbls/d. Compared to supply growth during prior upcycles, this expansion is considerably more restrained.
We observed in 2022 the demand for oil has been hampered by high energy costs, a gloomier macroeconomic outlook, and China's zero-Covid policy. Beginning in 2022, it was projected that the world's oil demand will increase by more than 3 million bbls/d YoY and reach pre-Covid levels. Demand, however is predicted to increase at a slower rate this year, still below pre-Covid levels.
While demand is anticipated to increase by around 1.7 million bbls/d in 2023. Considering the anticipated economic rebound, China is anticipated to contribute over 50% of the growth.
Quarterly global oil balance (MMbbls/d)
Source: ING Research based on IEA, EIA and OPEC
TRINIDAD AND TOBAGO 2023 FORECAST
Globally, policymakers continue to contend with combatting high inflation without unduly curtailing economic growth. The International Monetary Fund (IMF), in its July 2022 World Economic Outlook (WEO) update, reduced its growth outlook for 2022 to 3.2 per cent, 0.4 percentage points lower than its forecast in April 2022. Prospects for a ‘soft landing’ for economies such as the U.S. appear limited, with financial markets already reflecting recession concerns.
The global initiatives to supplement supply shortages in energy has the potential to relieve some supply-side pressure, the protracted nature of Russia’s conflict with Ukraine and the resultant mounting sanctions and disruptions to supply chains are also expected to keep prices at current levels over the next 12 months.
Inflation Rate in Trinidad and Tobago will close 2022 around 6.00 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. In the long-term, the Trinidad and Tobago Inflation Rate is projected to trend around 1.80 percent in 2023, as projected by econometric models. That is, an upward trend from inflation in 2020, a significant driver to headline inflation has been escalating food prices.
The growth of the real gross domestic product of Trinidad and Tobago was forecast to decrease between 2022 and 2027 by in total 2.4 percentage points.
Domestic Interest Rates
In 2022, the U.S. Federal Reserve Bank increased the benchmark rate by 4.25%, while over the same period the Bank of England hiked rates by 3.25%. The objective was monetary tightening that should cool inflationary pressures.
In comparison, the CBTT repo rate ended the year at 3.50% and interesting to note, the TT/US differential on the 3-month Treasury Bill ended the year at negative 3.87%, clearly an anomaly. The differential on the 10-year Treasury Note was 1.48%. If this trend continues according to economic theory, we should expect higher interest rates in Trinidad during 2023.
Albeit the banking system excess liquidity was a healthy TT$ 7.1 billion in December, but expected to fall as quarterly corporate taxes are paid towards the end of the month. Buoyant energy prices have benefited Trinidad’s fiscal accounts. Expected is a budget surplus in 2022 and a pickup in both the upstream and downstream energy business in 2023.
Observed in 2022 was business expansion as the financial system credit to business increased by 9.6% in October, year-on-year as reported by the Central Bank. A positive indicator as we head into 2023.
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