Investment management firm's mid-year outlook suggests economic headwinds will subdue equities for the remainder of 2023
Investors should prepare for some challenging economic and market conditions for the second half of 2023 according to a new outlook from Mackenzie Investments.
The firm says that a return to a balanced economy where inflation is tamed but without a recession (a so-called ‘Goldilocks economy’) is not on the horizon for Canada or globally.
Instead the domestic and global economy is destined for a longer period of central bank tightening, tighter credit availability, stubborn inflation, and geopolitical events.
This will impact capital markets which may well have a bearish narrative in the months ahead.
In its 2023 Outlook: The Blue Book, Mackenzie predicted that inflation would be sticky and interest rates would remain high and the fallout of that is starting to be seen, especially in the US with the recent bank failures.
“As a result, credit creation will slow at the margins, making it more difficult for businesses and households to fund spending, the impact of which may ripple throughout the economy,” said Steve Locke, CIO of Fixed Income and Multi-Asset Solutions at Mackenzie Investments.
Major impacts on capital markets
In the firm’s mid-year outlook, it points to a slowing global economy and highlights three areas that are likely to dominate capital markets in the months ahead.
Firstly, tighter monetary policy that has led to lenders tightening access to credit and the cost of borrowing rising. Mackenzie says investors should not expect imminent rate cuts.
“Achieving the 2% inflation target remains the priority for central banks, which will encourage them to keep interest rates high throughout 2023,” Locke noted. “As a result, bond yields will remain elevated, creating pressure on consumers and business from higher interest rates on debts in the months ahead.”
Secondly, risk assets such as equities are likely to be impacted by headwinds consistent with a slowing economy such as weakened wage rises dampens consumer spending.
“Strength in the consumer sector and low unemployment have so far helped to offset the impacts of high inflation and interest rates, but growth has slowed, particularly in Canada as high consumer debt is negatively impacted by elevated interest rates,” said Lesley Marks, CIO of Equities and Mackenzie Investments.
Finally, the ongoing war in Ukraine has increased the likelihood of a recession in Europe in 2024. Meanwhile, China is set to rebound from its strict Covid lockdowns and help boost emerging economies.
Mackenzie also sees China driving demand for alternatives to the US dollar as reserve currencies.
“Geopolitical dynamics have continued to fuel economic concerns, with conflicts mounting and tensions rising between global powers. It will be important for investors to heed the potential of geopolitical risks in their portfolios as we navigate our way through to 2024,” concluded Marks.
