Outlook of Fourth Quarter 2023 : Market Trends, Refinancing Needs and Recession Risks
As it turns out, even though the economy may be in recession, the market is still staying strong. However, whether this situation can continue is yet to be determined.
Have central banks succeeded? Tighter monetary policy appears to have brought inflation down from its peak without causing serious damage to the economy. However, the central bank has not yet “completed its mission”. Inflationary pressures still linger, interest rates appears to stay high for a long time, and large amounts of debt are coming due, all of which are troubling.
The last quarter of each year often heralds future trends, and we believe the following three themes will determine the market’s situation entering 2024.
Indicator divergence
Inflation fell in the third quarter, but please note that the headline inflation data masks a more nuanced picture.
There are signs show the tightening monetary policy has not been transmitted to the real economy as quickly as the central bank expected. For example, many companies are earning interest on deposits but (due to previous multi-year agreements) are not yet paying higher interest on debt borrowed at ultra-low rates during the pandemic. We believe the transmission mechanism has been delayed rather than broken, and that the situation may reverse quickly, especially when companies start to refinance for debt next year.
Meanwhile, analysts at Fidelity Global generally forecast that prices will rise moderately in the next six months, noting that supply chain pressures in industries such as industrial and communications services still exist. The Fed has yet to address inflation.
Will interest rates remain high for a long time?
Central banks have learned from their mistakes two years ago and do not intend to underestimate inflationary pressures this time. The message from the central bank therefore seems clear that interest rates will remain high for longer. However, this is a risky strategy, especially with large amounts of corporate debt coming due soon. Many Fidelity Global analysts predict future interest expense will increase of 15% to 25% for the companies they cover.
The situation is still very uncertain, leading us to believe that there’s still high possibility of an economic recession. We estimate that the probability of a cyclical recession in the economy is 60%, and the unemployment rate of U.S. will rise to 4.4% to 6.5% in the next 12 months.
Made in Asia
Other positive factors for Asia include the rise of AI. Asia, home to some of the world’s largest semiconductor and component manufacturing companies, will benefit from the spread of AI and automation, as well as the global adoption of renewable energy.
As for other Asian markets, India has been growing strongly and steadily. Driven by the service industry and manufacturing industry, the economic growth rate in the second quarter reached 7.8%, ranking among the fastest in the world. India’s favorable demographics will continue to drive the financial industry and consumption. In the ASEAN region, Indonesia’s nickel and copper exports continue to increase as the world transitions to net-zero emissions. After months of political turmoil, Thailand is beginning a new chapter.
The problem is that export-oriented Asia is unlikely to be immune to a recession in developed Western countries or a slowdown in China’s economy. For example, Malaysia’s second-quarter GDP growth slowed due to a decline in exports. At the same time, Asia also faces potential inflation and climate risks. India has just experienced its driest August in a century, which will affect this year’s harvest and may trigger more export restrictions.
Across Asia, familiar dynamics are emerging, and while there are many risks and disruptions to avoid, the focus is on looking ahead. As the cycle changes, there may exist clear winners from Asia’s structural transformation.