Tuesday 05 Dec 2023
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PICKING up from my last piece on the forthcoming US earnings recession, data released in January continues to point to the same conclusion. Economic data for both manufacturing and services in the US has been getting worse. US companies announce further staff cuts. And US Fed meeting minutes released suggest that interest rates will be rising to more restrictive levels in the next few months in 2023.

The one thing that continues to defy the odds is unemployment, which continues to stay low. On developments in Asia, China's President Xi Jinping’s messy reopening has caused panic for some who are worried about how the Chinese healthcare system will cope. While for others, it spells relief from the Covid-19 lockdown.

Signs of a recession

Early January data released by the US Institute of Supply Management (ISM) for manufacturing, a leading indicator of US factory activities, is signalling a recession in the manufacturing sectors of the US economy. Actual reading came in at 48.4 in December 2022. A reading below 50 indicates falling activities in US factories surveyed by the ISM.

Looking at the services industries, the US ISM also have another leading indicator called the ISM index for services. This is also saying the same thing — that activities in the US services sectors are also slowing. The services index came in at 49.6 in December 2022. These two indices suggest the US economy will slow over the next few months. These signposts of recession will drive markets lower as investors survey the environment.

US corporates are also making layoff announcements in the new year. The latest being Amazon’s cut of 18,000 staff members. This suggests Amazon executive chairman Jeff Bezos is seeing weaker demand in the months ahead. Although the overall number of unemployed people is still exceptionally low in the US, these announcements are in anticipation of what is coming, so backward-looking information such as unemployment rates might not be a reliable indicator.

Finally, the US Federal Reserve (Fed), the US central bank, released the minutes of its December meeting. These minutes provide more details and are indicative of how it thinks about the future. In these minutes, Fed chairman Jerome Powell remains committed to a higher Fed Fund Rate in the fight against higher prices. He talks about the need to make “unpopular” decisions for the long-term health of the US economy.

The minutes further suggest the Fed Fund Rate is likely to stay higher for longer for the year 2023. And only to see a reduction to 4% in 2024. Investors looking for a pivot to easier monetary policy would do well to adjust their expectations. Hope for a rate cut is without any strong reason, and Jerome Powell is rightly sticking to the message of “unpopular” decisions.

Investors need not despair, they can look forward to the Fed Fund Rate peaking in the first quarter of 2023 after the unprecedented rise in 2022. The engine for falling bond prices is close to stopping. Price correction in 2022 now means attractive entry prices for high quality bond issuers that will get through the impending recession and emerge stronger. With interest rate risks priced in, this asset class is looking attractive for investors looking for income in a recession year.

The US dollar, the darling of 2022, is also looking tired now that the support from rising interest rates is weakening. With a recession on the way, the US dollar is no longer king. Gold is shining once again as a recession haven. Fundamental demand for gold is growing, a consequence of rising global geopolitical tensions. Paired with a weaker US dollar, gold looks attractive at the US$1,750 per ounce level to add to one’s investment portfolio.

Green shoots in the winter thaw

Xi has been busy, showing up in the G20 meeting in Indonesia in late 2022 to ease tensions between China and the US. Then in early 2023, China began to ease Covid-19 restrictions on the back of protests in parts of China. Tired from lockdowns and eating rotten vegetables handed out during the time, the Chinese population vented their frustration. The combination of higher elderly vaccination and lower severity of the Omicron variant means China took the calculated risk of easing the dynamic zero policy.

Looking back at Malaysia’s reopening in 2022, it was indeed messy. Pharmacies ran out of fever and flu medicine. Doctors and nurses worked overtime as infection rates climbed. The spread of infections meant workers calling in sick for work. And factories and services would be short of staff due to Covid-19. In the immediate term, business activities would suffer.

In China, the same situations are magnified many times. This is simply because China’s population is 1.4 billion while Malaysia’s is a mere 33 million. Having said that, this wave of easing across China was also a relief for the many who were healthy and locked down. Small businesses and their employees cheered the easing measures after suffering immeasurable losses in profits and income respectively. And once China acquires herd immunity, the positives from reopening will be a welcome sight.

As I write this, the high frequency data such as subway ridership is already showing improvement, and travel bookings are climbing rapidly. If Malaysia’s case is a good guide, China’s gross domestic product growth of 5% in 2023 looks solid indeed.

Investors have been disappointed before by China’s inconsistent policies. It is only right to be suspicious after many disappointments in the past year. However, investors also have the benefit of hindsight when it comes to economic reopening. All the Asian countries’ reopening stories suggest the winds of reopening is unlikely to change direction. And the right thing to do is to look forward, like the market is doing.

The MSCI China closed up 5% in 2022 and, year-to-date, it is up 10%. For those who have kept faith in their investments, it is advisable to stay invested for the recovery. For the others, it is still early enough to think about putting some of your cash to work.

Happy investing in the Year of the Rabbit!

Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd

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