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Macroscope | Investors can look forward to four powerful tailwinds this year
- After last year’s dismal market performance, another year of negative returns for both bonds and equities looks unlikely
- Disinflation, lower interest rates, China’s reopening and the transition to renewable energy will sustain returns going forward
Reading Time:3 minutes
Why you can trust SCMP
The gloom spurred on by 2022’s dismal market performance has given way to optimism this year. Indeed, markets have been performing well since October. It was always unlikely there would be another year of negative returns from both bonds and equities.
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Higher interest rates have created a better platform for positive returns from fixed income markets while a modest improvement in the economic growth outlook has supported equity returns.
Four themes will help sustain returns going forward.
First, disinflation. It is happening where inflation has been a huge problem. Consensus forecasts have consumer price inflation falling in the US, Canada, major European economies and across a range of emerging markets. For global financial markets, what happens to inflation in the US and Europe is key.
In 2022, key upside inflation risks came mid-year as energy and food prices responded to Russia’s invasion of Ukraine. However, by year end, monthly increases in consumer prices started to normalise to historical averages. While some inflation indicators might turn out to be somewhat sticky, the general theme of disinflation is likely to be a major investment narrative this year.
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This is good for market returns. It means we are close to the peak in interest rates as central banks will be happier once inflation is falling. Bond market returns should continue to be healthy with investors benefiting from better income returns, reflecting higher yields.
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