Geopolitics
Stocks will only get temporary relief from gridlock. Inflation will abate but then remain sticky. US and global policy uncertainty and geopolitical risk will remain historically high.
Expect the Middle East to create new and unexpected energy supply disruptions on top of the Russian energy shock.
Stay short Greater China assets. Stay long Japanese yen. Hold back on Brazil for now but look forward to opportunities in future.
The 20<sup>th</sup> Communist Party Congress concluded on Sunday with President Xi Jinping cementing his third term in office. We are maintaining our cautious stance on Chinese stocks and the exchange rate. The lack of a significant shift away from current macro and regulatory policies means that China’s economic recovery and stock performance remain at risk.
The midterm election will bring some relief from US policy uncertainty. But this relief will be short-lived unless Republicans win the Senate, which is still too close to call. Global policy uncertainty and geopolitical risk will remain high.
Favor US and Southeast Asian stocks over global stocks. Stay underweight China, Hong Kong, and Taiwan.
Stay defensive at least until the US midterm election is over. Gridlock is disinflationary in 2023 and hence marginally positive for US equities. But any relief rally will be short-lived as recession risks are very high.
Investors should overweight US defense stocks in a world where US war-weariness is declining and the Biden administration is likely to exhibit an increasingly hawkish foreign policy.
The Fed says that to get back to 2 percent inflation, the US unemployment rate must increase by ‘just’ 0.6 percent through 2023-24. All well and good you might think, except that the Fed is forecasting something that has been unachievable for at least 75 years! Is the Fed gaslighting us? And what does it mean for investment strategy?