We are a few days away from slamming the door on 2022 and the largest fund managers are bringing out their forecasts thinking about the next year. Especially if the markets will have to play through 2023 with a deep recession and if we have to take advantage of the moment to look for clear investment opportunities in the face of the fall suffered by practically all asset classes.
In the case of JP Morgan Asset Management, looking ahead to 2023, the main unknown, from their point of view, would in fact be quite simple: will we be able to control inflation as economic activity slows? If this is the case, central banks will stop raising rates and those recessions that do occur will probably be mild.
But, if inflation does not begin to recede, we will be facing a less favorable scenario. “Fortunately, we believe that there are already convincing signs that inflationary pressures are easing and will continue to do so in 2023,” says the fund manager in its forecasts for the new year.
As usual, property markets are the first to react when central banks hit the brakes. The notable rise in mortgage rates is hampering demand for new construction and, in our view, the effect of further weakness in the real estate sector will be felt in the global economy in 2023.
“In this context, construction will weaken, spending on furniture and other household products will fall, and the collapse in housing prices could negatively affect consumption in the coming quarters,” highlights the US manager. The slowdown in activity should have the intended effect and contain inflation.
The impact of rate hikes on mortgages will probably be less severe. In the United States, households were right to take advantage of the low rates of a couple of years ago. In fact, today only an approximate percentage of 5% of American mortgages are at variable rates, when in 2007 the figure exceeded 20%.
In 2020, the 30-year mortgage rate in the United States reached 2.8% and, in doing so, triggered a flurry of refinancing operations. Therefore, unless these families now intend to move, their disposable income will not be affected by the recent rate hike.
The experts from the US firm specify that it is also worth remembering that not everyone has a mortgage and that those who have cash savings will experience an increase in their disposable income as a result of rate rises.
“This factor is especially important in the case of the large continental European countries, where there are fewer households with mortgages and where household savings as a percentage of GDP is higher than in the United States and the United Kingdom. In fact, there were several occasions on which the European Central Bank (ECB) was used to say that zero interest rates would be counterproductive due to the level of savings in the region, ”he adds.
Recessions will be mild
But the main takeaway from JP Morgan AM is that signs that inflation is reacting to weakening economic activity will emerge in the coming months and will cool. “It may not quickly return to 2%, but we suspect that central banks will have no problem stopping applying rate hikes as long as inflation moves in the right direction,” they predict.
Against this vision there are two types of bearish forecasts, according to his analysis: “On the one hand, there are those who believe that we are once again facing the inflationary problem of the 1970s, whose solution strengthens a much deeper recession and an increase much larger in unemployment than we expect.”
“On the other, we have those who argue that it is difficult to design moderate recessions, since slowdowns tend to come to life and tend to get out of control,” he deepened his vision. “This has been the case in the past, when deep recessions consisted of busts after a boom period,” she adds.
In this sense, after excessive growth in a certain area –usually business investment or the real estate sector– the economy used to take a long time to adjust and find alternative sources of growth. “This time, on the other hand, the growth of investment and the real estate sector has been more moderate”, they clarify. Thus, exponent, it is most probable that “moderate recessions” will arrive.
Moreover, it has often been excess bank lending that has fueled a euphoria that has historically given way to periods of weak credit growth that have deepened recessions. On this occasion, however, the more than 10 years of regulation since the end of the global financial crisis have caused commercial banks to reach the real slowdown, exceptionally absorbing capitalized and having passed insufficient stress tests that guarantee their without triggering a crisis. Credit, according to JPMorgan.
In summary accounts, in his opinion, after a boom period “comes a setback.” On the other hand, these boom periods have been conspicuous by their absence in the last decade in which the activity of the sectors has been, in the best of cases, quite slow. “Although it is always necessary for the economy to weaken for inflation to moderate, we do not foresee a period of prolonged or deep contraction,” he comments.
“Taking into account that both stocks and bonds have already experienced falls in their prices, we believe that, despite the fact that fixed income will increase,” they conclude.