Domestic Politics
Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.
US financial instability reinforces our bearish investment outlook by weighing on economic growth and corporate earnings while also increasing US policy uncertainty and geopolitical risk.
Investors in Europe and the American West are already starting to think about the implications of the 2024 election, given that sticky inflation and tighter monetary policy keep the risk of recession elevated.
The first legislative meeting of Xi Jinping’s third term suggests that Chinese policy is continuous and consistent with the previous ten years, which is negative for long-term productivity.
Investors should avoid / stay underweight Turkish stocks and local currency bonds versus their respective EM benchmarks. Stay underweight Turkish sovereign credit.
Great Power Rivalry is taking another leg up as Russia and China further align their geopolitical interests. Investors should stay long USD-CNY, favor defensives over cyclicals, and markets like North America and DM Europe that have less exposure to geopolitical risk.
Two developments this week reinforce our key views for 2023. First, Russia’s threat to reduce oil production by 500,000 barrels per day, while escalating the war in Ukraine, confirms that geopolitical risk will rebound and new oil supply shocks are likely. Second, China’s credit numbers for January confirm that the country is trying to stabilize the economy but also that stabilization will not come quickly. Moreover, stimulus does not resolve structural problems over the long run. We remain defensively positioned overall and underweight Chinese assets.
Biden’s State of the Union address will mostly be blocked by a gridlocked Congress. The one point of agreement, big spending, spells trouble over the long run, even if a technical default is avoided this fall.
The risk-on rally is challenging our annual forecast so we are cutting some losses. But we still think central banks and geopolitics will combine to reverse the rally later this year.
President Biden’s political capital has fallen as he enters a challenging year that will include a domestic faceoff with the House Republicans and foreign crises stemming from China, Russia, and Iran. Stay defensive and prefer bonds over equities.