Recession and inflation: What 2023 holds for investors

Preservation of capital is at the top of the agenda during global instability periods. What does 2023 hold for the global economy and what challenges should Russian investors prepare for? Former head of market analysis at Otkritie Investments Anton Zatolokin has shared his economic forecasts and approaches to developing investment strategies during the first meeting in a series launched by United Advisors, a Central Bank accredited project for people interested in investment.

Baseline scenario: Recession

The world’s largest economies are already teetering on the brink of recession. Technically, a recession was already recorded in the United States in the first and second quarters of this year. The country’s GDP shrank 1.6% compared to the previous quarter, and then by another 0.6%. The US economy started doing a little better by end of the year, but the outlook for 2023 is grim nonetheless. In China, second-quarter growth was below 0.5% compared to the same period in 2021. Next year, recession is likely to affect most of the world’s economies and become a truly global trend. According to the baseline scenario, this should be expected by the middle of next year, Anton Zatolokin said. At the same time, with a high degree of probability, it will be a controlled process.

“The baseline scenario includes a smooth transition to growth through a controlled and moderate recession,” Anton Zatolokin notes.

True, the recession can drag on and even get out of control, and if that happens, the world will face spiraling unemployment and a massive sell-off of assets, similar to the 2008-2009 situation, the expert adds. However, the probability of a negative scenario does not look high; it is only about 10%.

Inflation: Buckle up back there

Most countries will be dealing with accelerated inflation in the next few years, Anton Zatolokin predicts. On the other hand, high inflation can indirectly benefit the global economy, as controlled inflation helps lessen the burden of the national debt. In developed countries, total debt has reached 250-350% of GDP (including public debt, corporate debt, as well as household debt), the expert explains. This actually means that economic actors’ future revenues have already been spent for many years ahead.

According to the expert’s estimate, inflation can be maintained at about 5%, which is noticeably higher than the formal targets cited by Western economists. However, it is unlikely to reach the double-digit figures of the past few years, including the Covid-19 pandemic year, or even come close to them.

Drivers of growth

Developing markets are likely to lead the new round of economic growth after the recession, the expert predicts. Those countries can play the role of trailblazers in the global economy. This also applies to stock markets, where stocks from developing countries are still at their lowest in the last 20 years, but this may change in the future.

A similar reversal of roles has occurred before: for example, developing countries drove the global growth in the 2000s before the 2008 crisis. After 2008, the dynamics began to reverse again: developing markets began to slow down, while growth in developed countries steadied thanks to monetary stimulation (low interest rates, redemption of bonds by central banks).

The next questions are whether all developing countries will be involved in the new growth cycle to the same extent, and whether China, which also has a large debt, will be able to keep growing at the same pace. The emergence of new global economy locomotives seems more likely. One of the countries claiming this role is India, Anton Zatolokin notes.

The new stars

As the center of growth shifts towards developing countries, their national currencies will also have stronger positions. The US dollar, as well as the euro, may weaken in this situation. At the current stage, international investors seem to be as interested in the dollar as ever – the US dollar is at its highest against most world currencies in almost 20 years despite the rising interest rates in the United States. However, the situation in the foreign exchange markets may change in a few years, and the currencies of developing countries may be the new stars.

Investors have been through this before. In the early 2000s, the Russian ruble was appreciating fast, too, with the US dollar falling below RUR 24 in 2008, Anton Zatolokin recalls. Other currencies of developing countries also strengthened at the time, including the Brazilian real, the Mexican peso, the Indian rupee, the Chinese yuan and others.

Portfolios and strategies

The situation on the stock market remains challenging and should be taken into consideration when forming investment strategies. For example, the expert notes that Russian investors should pay more attention to Russian assets, as now it would be reasonable to build 70-percent Russian portfolios. Currencies can serve as good defensive assets. Securities and, in particular, federal loan bonds and state-run companies’ debt securities can be a good alternative, making up to 60% of investment portfolios. The remaining part may be built of shares of Russian corporations that might seem underrated at the moment but may see a serious growth in the future.

When investing in foreign assets, one should consider the prospects of a looming recession. Therefore, it may be practical to buy conservative and quasi-money instruments such as short-term deposits, money market funds, short-term bonds and their ETFs. One should be particularly meticulous when it comes to shares and focus on stable companies, including those from the utilities industry, the food industry and industrial production.

By Olga Blinova

Previous ArticleNext Article