Daniel Lee

Jul 5, 20236 min read

2023 1st Half Market Updates

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Now let us talk about what has happened in the markets over the last 6 months.

I will be breaking this update into 2 distinct parts; the first part will revolve around the price behaviour of the S&P500 and Asia Equities while the second part will dive into three big themes that occurred in the first half of 2023 that are worth keeping an eye on.

What Happened in The Markets

In terms of price behaviour, the first half of 2023 has been a roller coaster ride with both the S&P500 and Asian Equity experiencing massive run-ups in prices only to come back down in the first quarter of 2023.

Year to date, the Asian market is seen to be trading sideways despite being undervalued while the S&P500 has been trending up despite being overvalued.

In my opinion, the bulk of the price movement can be attributed towards investor sentiment as opposed to fundamentals.

In the West, investor sentiment has largely improved, largely due to the hype surrounding artificial intelligence, which had contributed significantly to the growth of tech stocks and hence the S&P and Nasdaq-100 performances.

In Asia however, the continued push by the West to villainize China and the worsening of geo-political ties between the West and China had resulted in a poor investor sentiment towards China and hence Asia (given that China still accounts for a large part of Asia’s economy).

Ironically, the push against China continued despite increasing trade volumes between the West and China. That being said, the price movement has been largely sentiment-driven and is not supported by fundamentals which is why I strongly believe that it might not be sustainable.

1. Fed Pause - Breather for The Market

The first theme that I would like to talk about is the topic of rate hikes.

As of 14th June 2023, the US central bank has announced that they will be pausing their rate hikes for now but will be open to increasing rates again at the end of the year (for now what is pretty much confirmed is another 2 more rates hikes) if inflation does not meet their expectation.

The decision has left the benchmark federal fund rates in a target range of 5% to 5.25% for 2023 before coming back down in 2024.

Implications

This will provide a breather for the markets as they will not have to deal with higher and higher borrowing costs which erode their bottom-line profitability.

A pause in the rate hike will also be good news for emerging markets and countries that are sensitive to the USD as the USD is expected to maintain at its current levels and not strengthen further.

Overall, a pause in the rate hike will allow the market to adapt to the current interest rate environment which will result in higher stability that is more than welcomed.

At the current junction, the odds of further rate hikes at the later end of the year are still quite high and inflation, while declining steadily over the past year, is unlikely going to meet the Federal Reserve target of 2% anytime soon.

This brings me to the second theme that investors should be aware of.

2. The Most Anticipated Recession

The second big theme of the second half of 2023 revolves around the topic of recession.

At the moment, the market is still anticipating the economy to enter into a recession in the second half of 2023. The yield curve inversion is sending a renewed warning of a recession which highlights the market scepticism over the federal reserve’s ability to avoid a hard landing.

I believe that it is highly likely that we are going to see some form of recessionary reading for the US economy moving into the second half of 2023 or the first half of 2024.

However, the recession that we will be experiencing will likely be that of a technical recession (2 quarters of negative GDP Growth) instead of a depressive recession (mass unemployment).

Despite massive layoffs in the technology sector after companies were over-hired during the pandemic and the drag from higher borrowing costs, the services sector, the leisure and hospitality category, is still catching up after businesses struggled to find workers over the last two years. Industries like healthcare and education also experienced accelerated retirements.

All this points to a rather strong labour market which is the key reason why I believe that we might be able to avoid a depressive recession and instead, just experience a technical recession moving forward.

Implication

If the recession that materializes is a technical recession, I doubt that it will have any heavy negative impact towards investor sentiment given how largely anticipated the recession is. (we’ve been talking about this since 2021).

However, should earnings experience a decrease - which it likely would, it is highly probable that broad market prices will come back down to maintain current valuations multiple.

While the market has been anticipating an earnings recession, this has yet been priced into the market as earnings thus far have continued to beat analyst estimates.

This means that should earnings fail to meet or beat expectations, it might result in a sudden shift in market pricing as investors rush to price in the previously anticipated earnings recession after being carried away with a previous earnings beat.

3. China’s Disappointing Recovery

The last theme that we’re going to talk about revolves around China’s economy.

Despite reopening, China’s economy has not rebounded as strongly as analysts were expecting and this had resulted in a major sell-off in Chinese equities.

This disappointing result can be largely attributed to two sources:

1) China’s reopening came at a time when the global economy is slowing down drastically, as a result, while domestic consumption witnessed a good recovery after the reopening, industrial output had weakened as a result of lower global demand and export.

2) On top of the slowdown in the global economy, China’s domestic property woes had also contributed largely to the poor sentiment among all stakeholders - investors, businesses and consumers - which had resulted in higher savings rates instead of investing and consumption.

To combat the lacklustre economy and poor sentiment, the government had decided to adopt a more stimulative stance via rate cuts and other policy measures that are designed specifically to target the property industry and domestic consumption.

Implication

Unfortunately, it is unlikely that the Chinese economy would bounce back up as rapidly as the market has hoped until the global economy stabilizes and general sentiment within China recovers.

On a positive note, however, the balance sheet of households and businesses is very healthy unlike that of the West but due to cultural differences - the Chinese consumer tends to be more conservative than those of the West -, the recovery of the Chinese economy will exhibit a very different behaviour as that of the western economy.

In the short run, I expect China’s economy to be performing at an “Okay” level as the government’s focus has always been on achieving long-term sustainable growth at the expense of short-term pain.

Closing Message

As stated in my 2023 Market Outlook, I expect 2023 and 2024 to be rough for the markets as prices remain depressive but as long as we can get through this period, which we will eventually, we will look back at this episode as a plausible opportunity for the next decade.

2023 will be a good year to accumulate and load up more on undervalued investments, especially those in the Asia region, as prices continue to remain depressive at the back of fear and pessimism.

This is the exact time that we “buy low sell high” by embracing the pain and positioning ourselves for the eventual recovery.

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