Monetary policy to dictate global equities’ volatility and direction


An ongoing sharp slowdown in 2023 at the global level is very likely, says manager of the Martin Currie Global Portfolio Trust, Zehrid Osmani.
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For global equities, monetary policies will dictate market volatility and direction, forecasts Zehrid Osmani, head of the Global Long-Term Unconstrained team and manager of the Martin Currie Global Portfolio Trust.

“As we look into 2023, we believe that monetary policies will remain the key determinant of both equity markets direction and style leadership between growth and value. Adjusting monetary policy expectations have been the dominant driver of share price returns in 2022; we expect this to continue to be the case in 2023, whilst we remain in this uncertain environment around inflation, and therefore around how much central banks will need to continue to hike interest rates to combat the elevated inflationary pressures.”

Central banks have been clear in 2022 that they are focused on inflation; they have effectively moved from doing whatever it took to prop up growth to whatever it takes to reduce inflationary pressures, he explains.

“During the course of 2023, if inflationary prints overshoot expectations, monetary policies will likely need to further adjust upwards, which will weigh negatively on equity returns and quality growth style, to the detriment of value.

“Inversely, as we have seen with the latest inflation prints, if inflation undershoots, monetary policy expectations will adjust downwards, which will be more supportive for equity markets and the quality growth style. There is a likelihood that central banks start shifting their focus toward growth in 2023 if recessionary concerns grow significantly, as we detail further down.”

A sharp slowdown in 2023 remains our core scenario

He says that with leading indicators both on the manufacturing and services sides continuing to deteriorate across key regions globally, 2023 could be a year of low growth at the global and US levels, while he says that Europe is heading into stagflation.

“An ongoing sharp slowdown in 2023 remains our core scenario at the global level with a probability of 65%-70%. We have also increased the probability of global stagflation in 2023 to 30%-35%, up from 25%-30% previously.”

For the various regions, Osmani says:


A key determinant of the global economic cycle will be the Chinese economy since it is the second largest globally. It will be difficult to predict the momentum in the Chinese economy, given the ongoing internal policy of zero-COVID, which could lead to periodic renewed regional lockdowns. We take the view that China will be unlikely to change its stance on its zero-COVID policy, given its less active and less efficacious vaccination program and healthcare infrastructure that would not be able to cope effectively with a sharp rise in acute cases. Any shift in policy stance on this front by Chinese authorities could lead to a rapid improvement in the country’s leading indicators, which would, in turn, lead to an improvement in the global economic cycle.


For Europe, we maintain our probability of stagflation at 70%, with a probability of sharp slowdown at only about 30%. Europe’s economic momentum will, in a significant part, be influenced by Chinese leading indicators, given the exposure to China by the European Union region and the more cyclical exposure of the European market. Energy supply risks in Europe will likely come back in focus again as we approach the winter 2023 months; any renewed risk of energy rationing could put further downward pressure on economic activity in that region in the second half of the year.


Furthermore, geopolitical risks remain omnipresent, both in Europe and Asia. The Russia-Ukraine ongoing conflict remains an important focal point, with risk of escalation in the conflict, but also a broadening of the conflict to the NATO block. Related to that, the ongoing energy supply risk for Europe will be important to consider, with the EU block needing to continue to make progress toward eliminating its dependence on Russian gas supplies. Ultimately, we believe that Russia’s importance on the international scene will have been permanently diminished. A resolution to this conflict could be an important driver of a risk-on rally in European equities in our view.

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The China-Taiwan geopolitical risk is likely to remain omnipresent for years to come, given the Chinese leadership’s stated intention to unify the Chinese territory. The timing of any flare-up in tensions is very difficult to predict, but this risk would have broader implications globally. China’s tensions with the rest of the world, particularly the U.S., are another important source of geopolitical risks, spilling over into technological conflicts, with the current U.S. administration taking significant regulatory steps to cut off China from access to leading edge semiconductor technology. This will clearly have implications for companies that are exposed to these regulatory changes.