The 2023 Outlook
- theaksharorg
- Feb 21, 2023
- 4 min read
2022 has certainly been a tumultuous financial year, not to mention sky-high inflation and central banks scrambling to catch on. Suffice it to say, it’s not a year we’re going to forget, but we must move on. One might wonder how 2023 looks from an economic perspective. Hopefully, (and certainly) 2023 won’t be as bad as 2022, due to central banks nearing terminal interest rates, following inflation expectations
we’ve all certainly heard about the recent Evergrande crisis in China, and the economic onslaught brought on by china’s zero covid policy. Hence, to remedy economic recovery, China has undertaken the following responses –
1) Lowering key short-term interest rates to boost economic recovery
2) Abandoning the zero covid policy to allow for more freedom in movement
3) Opening up its borders (mainland china)
These are a few of the measures undertaken by Chinese authorities, to supplement Chinese recovery. Now one may say, this is all well and good, but what does it mean for us, as people living in china? Much like India, China can also be classified into a category of countries called emerging markets, seeking foreign investment.
Hence, it makes sense why the performance of Indian and Chinese stock markets is compared, and why some investors prefer to invest in China. This is due to the P/E ratio of the stocks on the markets, which allows for the evaluation of both the equities and the markets. India’s stock markets have outperformed other markets, as demonstrated by the following data:
Clearly. India’s outperformance is characterised by positive returns, in contrast to negative global returns. This outperformance can be accredited to high domestic demand for both Indian goods and services, in contrast to the global backdrop.
India is also better insulated against global shocks due to its culture of saving, which has allowed for a certain amount of insulation against price surges and inflation.
Conversely, Chinese equities are characterised by lower trailing p/e ratios, which signifies Chinese equities as a better deal. Hence, due to the reopening of china, and India’s equities being valued at a premium, investors might move to different regions for investing their funds, such as other Asian Ems.
However, with the Chinese new year, one can expect a surge in spending, due to accumulated savings and revenge spending, a phenomenon noticed in post covid lockdown India.
These indicators signal a positive trend for the global macroeconomic backdrop since china’s reopening also helps deal with supply chain disruptions experienced by global clients as a result of the zero covid policy.
Moving on from china, let’s move on to India, and the new budget, which will be presented by our honourable finance minister Nirmala Sitaraman. This year’s budget introduces some crucial changes, especially in taxation. India recently overtook the United Kingdom to become the 5th largest economy in the world.
Hence, it is crucial now, more than ever for India to balance its budget and manage both taxation, to gear India towards achieving the status of a 5 billion dollar economy.
However, one of the key factors affecting GDP growth is interest rates, which are at the core of every financial discussion and determine stock market performance.
Almost every central bank in the world has raised; or is in the process of raising interest rates, to tackle inflation.
Before looking at interest rate hikes, however, it is crucial to understand inflation.
Inflation is defined as a rise in prices across an economy.
The main causes of inflation are –
Supply-side shocks for goods
Excess monetary supply
Price expectations and spirals
More importantly, however, it is crucial to understand that inflation is also a psychological phenomenon, and hence it is crucial for the federal reserve to not only reduce current inflation but also to manage long-term inflation expectations. In a recent survey of consumer expectations, mid-term expectations have remained constant at 3 %, which is in line with the fed’s long-term inflation targets.
Similarly, the RBI’s interest rate limits are between 2 and 6&.
One of the core mistakes of central banks was perceiving inflation as transitory since it has been a very permanent phenomenon.
Hence, FY 22-23 has been characterised by interest rate hikes, and as we enter the last quarter of this year, let’s review interest hikes made by central banks till 2022.
NY fed-
The RBI has recently raised the repo rate from 6.15% to 6.5% (35 bps rate hike, to curb inflation.
Inflationary data reading for December have been –
US CPI- month on month – (- 0.1%)
India CPI -month on month – (-0.45%)
This, however, comes as no surprise, due to the effect of interest rate hikes from the previous year. Interest rate hikes usually take about 2 or 3 quarters to make their way into the real economy, by the effect on the pricing of goods and services. One can expect the readings for inflation to go down this year, due to the impact of interest rate hikes during 2022.
In summary, what should you expect?
Banks will have interest rates at higher levels than in the past few years, as a result of tightening policy. China will remain a topic of interest, for reasons such as trade, homeland security, oil demand and more.
Although not mentioned, it’s crucial to also take into account India’s trading relations as it leverages its neutral stance in global politics to establish itself as the manufacturing house of the world. This is an opportune time to do so for our country, due to the reshoring of supply chains, and cost advantages provided by India's well-educated, English-speaking population, along with production-linked incentives introduced by the government
Another crucial component of India’s long-term economic strategy is the establishment of a free trade zone in Gujrat, via GIFT city, along with revisions in the taxation regime, and the establishment of an IFSC centre and aircraft leasing facilities.
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