Macroscope | China recovery and policy easing could make 2023 a year to remember for investors

With so much bad news already factored in during 2022, there is the chance markets could be surprised on the upside by unexpectedly better news in 2023

The stock market’s reputation as the top predictor of the economic cycle means investors should anticipate better news rather than looking over their shoulders

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An employee works on the assembly line of Great Wall Motors in Chongqing on September 22. China’s expected recovery should be a blessing for global recovery and world trade growth in 2023 as economic activity speeds up again. Photo: Xinhua

Published: 4:45pm, 26 Dec 2022Updated: 4:59pm, 26 Dec 2022

Investors have some tough choices ahead in 2023, and it’s all down to whether the global economy rallies or succumbs to recession in the coming months. The markets are divided, with optimists hoping for an early end to the Ukraine war and global interest rates levelling out while pessimists see more gloom from the cost-of-living crisis and world economic activity suffering more duress.

Stocks and bonds have both endured tough times in 2022, the US dollar’s strong run has come unstuck and investor sentiment generally remains defensive given the dearth of good news. The world will no doubt be happy to see the back of 2022, but the burning question is whether 2023 marks a return to normality and risk appetite taps back into a positive vein again.

On the positive side, there is still plenty of liquidity to nurture global economic confidence and boost financial markets. With a bit of luck, 2023 should be the year of cautious recovery.

The problem is that there is so much uncertainty. When the chips are down, investors naturally prefer to duck for cover into safe haven bolt-holes like cash, ultra-safe government debt such as German bunds and the US dollar.

With the war in Ukraine, the global inflation spike, higher interest rates and the threat of recession, it is no surprise world equity markets are feeling the strain. The US S&P 500 share index is down about 20 per cent in 2022 and risk aversion is on the rise again.

Even government debt markets have turned the tide on the recent bear market for fixed income. US Treasury yields have fallen in the last two months on safe haven fears as investors have begun to fret about the risk of impending recession.

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