Text on screen: Stephen Chang, Portfolio Manager, Asia
Text on screen: What are the key takeaways from our latest Cyclical forum?
Chang: After a difficult 2022, bond investors should be rewarded with more opportunities in the year ahead. We expect the global economy to face headwinds, with a modest recession in 2023 across developed markets as central banks battle to contain inflation.
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Key takeaways from PIMCO’s latest Cyclical Outlook
- Our baseline: modest recessions and moderating inflation across developed markets.
- However, a soft landing – i.e. inflation moderates, while real growth remains positive – is still plausible.
- Bonds are alluring again. We are focusing on high quality fixed income that offers attractive yields.
- With a range of possible economic outcomes, we are preparing portfolios to be flexible and resilient.
That said, a soft landing is also plausible. Consumer and business balance sheets are strong, with elevated cash reserves. Pandemic-related supply constraints created large order backlogs, pent-up demand, and margin expansion, which are all likely to support business activity. China’s reopening may also provide a tailwind to the global economy.
In terms of asset allocation, we believe any recession could further challenge riskier assets such as equities and lower-quality corporate credit.
But we continue to see a strong case for investing in bonds, after yields reset higher in 2022 and with an economic downturn looking likely in 2023. Generally, we are focusing on high quality fixed income sectors that offer more attractive yields than they have in several years.
At the same time, we’re preparing portfolios to navigate with flexibility in case of a more severe downturn and to have liquidity to take advantage of emerging opportunities from changing expectations.
Text on screen: What is PIMCO’s outlook for the Chinese economy?
Chang: With the end of the zero-COVID policy and faster-than-expected economic reopening in China, our baseline 2023 growth forecast for the country is between 5 and 5.5 per cent. While we expect some short-term disruption, a stronger growth rebound should follow, likely late this quarter or early in the second quarter.
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5% - 5.5%
PIMCO’s baseline forecast for China’s 2023 annual GDP growth
China’s recovery will be led by pent-up consumption demand, especially in the service sector. Indeed, travel-related indicators and mobility data have already bounced back strongly pointing to positive momentum in retail sales and consumption. We expect China’s consumer inflation will rise from 2 per cent in 2022 to our baseline of 2.7 per cent for 2023, which is still benign and below the official target of 3 per cent.
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2.7%
PIMCO’s baseline forecast for China’s consumer inflation in 2023
On the property front, while housing-related indicators remain weak, the market may stabilize over the course of this year after a raft of coordinated policy measures, particularly for the stronger developers. From a growth contribution standpoint, housing investment can post more of a flat impact in 2023 versus a major drag in 2022.
Macro policy will likely stay supportive in the first half of the year and then begin to normalize. Our key policy projections include: continued credit easing to support SMEs, the property market, manufacturing, and green investment; front-loaded fiscal policy to support infrastructure; and continued relaxation in regulatory policies in sectors such as housing, education, tech and gaming, in order to stabilize growth.
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PIMCO’s key policy projections for China:
- Continued credit easing
- Front-loaded fiscal policy
- Continued relaxation in regulatory policies
We are positive on China’s recovery in 2023 because its economic cycles tend to be policy-driven. As laid out by President Xi and his team at the Central Economic Work Conference in December, China’s economic agenda will be focused on one thing this year: growth. One area of headwinds to watch is the export sector, which has seen a sharp decline in demand in some of the major developed markets.
Text on screen: Looking at the broader Asian region, what is our macro outlook and the implications for portfolios?
Chang: Despite the global slowdown, growth is expected to remain relatively resilient in many Asian markets in 2023 as the recovery from COVID-19 continues. China’s reopening will also be marginally supportive, especially for Thailand and Malaysia.
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PIMCO’s outlook for the broader Asian region
- Growth is expected to remain relatively resilient in many Asian markets in 2023
- China’s reopening will be marginally supportive
- Core inflation remains high and sticky
- We broadly expect no rate cuts
Even though headline inflation across the region should continue to fall from its peak due to lower energy prices, core inflation remains high and sticky. As supply constraints further ease, core inflation could start to fall, but we may begin to see demand-driven pressures that have been absent thus far.
In some countries, such as Thailand and Malaysia, a relatively weaker external balance position compared to 2022 could put pressure on central banks to continue with their policy normalization. With the exception of Indonesia, most countries in the region have shown no signs of reducing their deficits, and we broadly expect no rate cuts.
For 2023, we expect duration turning to an underperformance but posting currency outperformance in Asia, reversing last year’s trend, as the region’s growth-inflation dynamics diverge from the rest of the world.