Q1 2023 Market Updates: A Roller Coaster Start
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Now let us talk about what has happened in the markets over the last quarter.
I will be breaking this update into 2 distinct parts; the first part will revolve around the price behaviour of the S&P500 and Asia Equities while the second part will dive into three big themes that occurred in the last quarter that is worth keeping an eye on.
What Happened In The Markets
In terms of price behaviour, the first quarter of 2023 has been a roller coaster ride with both the S&P500 and Asian Equity experiencing massive run-ups in prices throughout January only to come back down in February and March.
The rally in January can be attributed to the optimism that the global economy can address the inflation problem without causing a painful recession. That said, as the month progresses, investors' hope of a soft landing is slowly dashed as the strong economic data suggested a more aggressive rate hike.
This eventually led to the banking crisis that saw the collapse of regional banks like the Silicon Valley Bank and Signature Bank which is caused by a combination of poor management and the impacts of higher rates that made the banks insolvent, spreading fear throughout the market and causing the market to come crashing back down.
That pretty much covers what has happened to the market over the last three months and let us now move on to the three big things that are worth keeping an eye on.
Theme 1: US Perfect Storm
The first thing to should watch out for is how the US government and the federal reserve will be tackling the ongoing banking crisis while concurrently trying to tackle the ongoing inflation situation.
On one hand, with the fall of SVB, the federal reserve now has to deal with systematic failures caused by the management’s greed and stupidity which will deter the effectiveness of its ongoing quantitative tightening as the bailouts will increase their balance sheet while promoting moral hazard which will increase the risk of future systematic failures.
On the other hand, to address the inflation situation, the federal reserve has decided to continue with its current pace of rate hikes with a targeted terminal rate of around 5.1% which is consistent with its previous expectation.
The move may potentially result in more systematic failure as the higher cost of borrowing flushes out any unsustainable business model and poor corporate practices. That said, only time will tell if that happens which is why investors should pay attention to how the situation pans out and whether the fed will pivot should more systematic failure materializes.
Theme 2: BRICS++
The second thing to watch out for is the plausible expansion of BRICS which for those who are not familiar with the term stands for Brazil, Russia, India, China and South Africa which together represent the fastest-growing emerging economies in the world.
As a result of the Russia-Ukraine conflict, coupled with the strengthening of the USD, there had been a sudden increase in cooperation and collaboration among the emerging countries which had essentially revived the interest surrounding BRICS to an extent where other emerging countries are expressing their interest to join the bloc.
Countries such as the UAE, Saudi Arabia, Indonesia, Iran, Argentina, Mexico and many others had expressed interest in joining the BRIC as the relationship between the emerging countries had deepened as a result of the desire to reduce their dependency on the west and the USD, given the pain the west had caused to their economy during 2022.
While the BRICS had been pretty much negligible in the past, with the ongoing developments, it is worth paying attention to how the bloc may turn out as together, they account for over 40% of the global population and are often rich in natural resources.
Should the bloc expands and the political and economic relationship between the bloc members improves, it will be a positive development for the emerging countries as they can trade directly with one another without the influence of the west and potentially tap into a significantly larger market that was previously ignored.
This will be a headwind for the west and especially the US as that would mean that the reliance on and demand for the USD will decrease. As a result, it will put a dent in the west’s global influence as their ability to apply political pressure via threats of sanctions or trade blocks will be significantly impacted.
In short, a successful expansion in the BRICS will be a positive economic growth factor for the emerging markets and it will be a negative economic growth factor for the collective west as the balance of power shifts to be more even among the developed and developing regions.
Theme 3: China’s Expansionary Stance
The third thing to watch out for is how China’s economic recovery will play out on the global stage.
In a contractionary environment where central banks all over the world are raising interest rates to combat the effects of inflation, China is one of the few countries that adopts an expansionary policy in hopes to spur on their economic activity that was disrupted due to the previous covid lockdowns.
In fact, China’s GDP is expected to grow at around 5% and the party had expressed their intention to do what it takes to revive the economy this year.
However, in an interconnected world, global headwinds will inevitably pose a large threat to China’s ability to deliver its economic growth target should other economies fall into a recession or worse depression.
While China’s economic activity and consumer demand have shown signs of improvement, the sustainability of the recovery is still questionable as long as the global headwind persists.
That said, in a contractionary world, China’s expansionary policies and coupled with the growing economic interest among the BRICS nation are worth watching closely as they may eventually develop into a new factor of economic growth for China and the rest of the emerging markets.
As stated in my 2023 Market Outlook, I expect the next 18 to 24 months will be rough for the markets as prices remain depressive but as long as we can get through this period, which we will eventually, we will look back at this episode as a plausible opportunity for the next decade.
2023 will be a good year to accumulate and load up more on undervalued investments, especially those in the Asia region, as prices continue to fall and remain depressive at the back of fear and pessimism.
This is the exact time that we “buy low sell high” by embracing the pain that is bound to happen in 2023 and positioning ourselves for the eventual recovery.
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).
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