Evolving Markets

As an undergraduate economist, the subject of foreign exchange reserves and reserve currencies garnered scant attention because we were in a world of floating currencies in which FX intervention, when it did occur, was only ever modest and temporary. It was only in the mid-1980s, when a number of overtly mercantilist economies in Asia began linking their (frequently undervalued) currencies to the USD and acquiring specie that global reserves became a “topic”. During the 1990s, New Zealand operated without reserves.

I think that it was Henry Kissinger that once said that "academic politics is so vicious because the stakes are so low". However, when academic politics affects economic policymaking, the stakes are far from low.

Although recent headline-grabbing events within the banking system have moved the topic of a potential credit crunch centre-stage in the markets’ consciousness, the fact is that a credit crunch within the Global Financial System began a year ago, while that in the US domestic economy began late last year. More recently, Europe looks to have moved down the same path. Admittedly, the global situation did improve during December and early January, when global financial conditions eased for a variety of primarily technical reasons, but this has proved to have been only a false dawn.

Our Gravity Index for China has made only a very modest recovery so far this year.

We expect fairly rough sailing for the global economy, financial system and markets in the next two quarters, but we do not expect disasters and there should be major relief for stocks later in 2023 as central banks begin to ease policy.

A regular debate between the older and younger members of the Hunt-household revolves around whether old suspenseful Black-and-White horrors are actually more scary than vivid technicolour gore modern films. We suspect that for the Federal Reserve, what you can’t see in black and white may be the scarier concept…

We don’t expect smooth sailing for the global economy and markets, but there should be great relief for both stocks and bonds in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.

We have little (in fact, virtually no) doubt that the opening salvos of the monetary response to the Pandemic were driven by a sense of panic rather than by calculated analysis. The Federal Reserve appeared to be downplaying internally as well as externally the impact of the Pandemic as late as on the 11th March 2020, but by lunch time on the 12th March it was in full crisis mode.

Pundits need to be careful about scaring people regarding Japan and, thus, harming its economic future. This is especially true regarding recent high profile, wildly exaggerated tweets about demographics, a decades-old theme; clearly, this is a challenging theme, but Japan is certainly not going to disappear.

Going back to India for a month after two long years of not being able to visit my family, I was pleasantly surprised by the new normal. While there has been much adversity, COVID-19 has also sparked positive change, especially on technology adoption.