Moneycontrol Pro Panorama | Mid-year Outlook: Low visibility, caution is advised

Visibility in the second half of this financial year is likely to be lower given the uncertainties on macroeconomics, geopolitics, climate and interest rates.

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As we reach the midpoint of 2023, Indian markets are trading close to their all-time high levels. Global equity markets have also had a good run, considering the headwinds and negative news flows on various fronts.

The first half of 2023 saw several major US regional bank failures, a last-minute rescue of a 167-year-old Swiss bank by its historical rival, a German recession, US credit default swaps (CDS) exploding to 175 basis points (bps) from 15 bps, on fears over the debt ceiling. Despite these events, global markets have performed well, with the MSCI index giving a 6.8 percent return in the first half.

Now is also the time to plan for the second half of the year. A consensus view among foreign brokerages looking with a bird’s eye view is that the second half may not be as easy as the first. A note from Barclays Private Bank group warns that at a time of slowing growth, persistently high inflation, even if easing, and interest rates that are nearing a peak, investors and the authorities will need to tread carefully. Diversification remains key.

Visibility in the second half is likely to be lower than what it was in the first half, given the uncertainties on macroeconomics, geopolitics, climate and interest rates.

Barclays expects the macroeconomic data to deteriorate over the rest of the year with a base case scenario of a slowing down of global growth, but no contraction. Developed countries will likely flirt with a recession, posting anaemic growth. Lower growth is, in a way, good news as it should help ease inflationary pressures giving central banks some legroom for not rushing to lift rates.

Sounding more optimistic, KKR, a leading global investment firm, in its report says there is a lot of “complexity” out there to distract investors, with escalating China-US/Western tensions, a full-scale invasion of Ukraine by Russia, bank failures, increased political divisiveness, and a surge in AI-related breakthrough technologies. At the same time, central bankers are still trying to unwind what was possibly the greatest coordinated flush of monetary and fiscal spending during COVID that the developed market economies have ever seen.

Yet, despite all this uncertainty, the S&P 500 is up around 14 percent year-to-date (YTD) while the Euro Stoxx 50 and the Japanese Topix have each appreciated about 15 percent and 20 percent, respectively. High yield bonds have produced a total return of just over five percent YTD.

KKR believes that investors are still too conservatively positioned for the path forward. Rarely has there been such an intersection of poor near-term fundamentals, more than offset by a compelling technical backdrop (i.e., little new issuance supply, record buybacks) and resounding negative sentiment (S&P 500 shorts are near 30-year highs).

The coming six months will test the central banks in their fight against inflation. The winner, to some extent, will decide the market direction.

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Shishir AsthanaMoneycontrol Pro