China
On one hand, China will be exporting deflation to the rest of the world. On the other hand, core inflation is sticky in the US, making the Fed err on the hawkish side. Altogether, these crosscurrents are creating a toxic mix for risk asset prices.
The recovery of China’s industrial profits is set to disappoint in 2H 2023. Corporate profits are more sensitive to changes in prices than volumes. Given producers’ selling prices will keep deflating through 2023, industrial profits will only stabilize at a very depressed level even with a mild improvement in volume. A disappointing recovery in industrial profits entails more downward risks for A-share prices in absolute terms. Chinese 10-year bond yields are set to drop to a record low.
Recession is on track to start around year-end. Stocks usually peak shortly before recession begins. So, position defensively but be prepared for a few more months of the rally.
In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.
