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Economy could offer ‘a tale of two halves’ in 2023

U.S. economic performance could split 2023 into a slowing half and a growing half, says Brian Giuliano, senior vice-president and client portfolio manager with Brandywine Global Investment Management.

Speaking on the Soundbites podcast this week, Giuliano said all indicators point to continued slowing in the first half of the year, followed by some stabilization, especially if the macro environment can improve.

Overall, he said, growth is probably going to be lacklustre, given the extraordinary efforts by central banks around the world to wrestle inflation to the ground.

“Our outlook for the global economy this year is that we’re likely to see something between a soft and hard landing scenario for global economy,” he said. “But passengers need to buckle up because it’s likely to get bumpy.”

He said while inflation is currently falling, we could also be entering an era of notably higher inflation.

Among the signs that we are “in the early innings” of a secular rise in inflation, he said, are the structural pressures on energy costs and the kind of labour-market inefficiencies that could keep wages elevated.

“This decade is likely to be more inflationary than the last decade,” he said. “But the here-and-now story — the cyclical story — is that, in our estimate, inflation may actually fall harder than people expect in 2023.”

As evidence, he said recent supply-chain dislocations have been largely fixed, and the stay-at-home consumption bubble has popped.

“Right now, you’ve got companies that have very elevated inventories. They need to work off these elevated inventory levels. So, what they doing? They’re slashing prices,” he said.

Despite the easing of inflation, Giuliano is critical of U.S. Federal Reserve Board actions, particularly those from during the early part of Jerome Powell’s tenure as chairman.

“There are always things that you think they could be doing differently, or you think they could be doing better, or you think they shouldn’t be doing. They’ve got kind of an easy target on their backs,” he said. “However, I will say this has been a Fed, since Powell has been at the helm since 2018, that has been very dogmatic, that has been very stubborn and, frankly, often wrong.”

He pointed out that Powell initially backed raising the U.S. neutral rate of interest, only to reverse that position within months. He also believes the Fed remained too easy for too long as inflationary pressures were brewing.

“Now the long end of yield curve is telling Powell to slow down. The yield curve is inverted,” he said, and ultimately, something between a soft and hard landing seems likely for the U.S. and the global economy.

Opportunities, he said, currently lie in fixed income.

“If you underweighted fixed income the past couple of years, congratulations. That was the right call. You likely protected the downside, protected principle, in what was the most challenging bond market in modern history,” he said. “But a lot has changed in a very short period of time.”

In the corporate credit space, he particularly likes triple-B names as well as higher-quality high-yield names.

“We don’t want to go too low in credit quality because of macroeconomic concerns, all of the risk factors, and the potential for a hard landing scenario this year,” he said. “And we don’t want to go too high in quality because there just isn’t as much value there.”

He favours a mix of non-cyclicals in case the global economy sees a hard landing, and cyclicals that are traditionally associated with reopening trade, as well as some energy, metals and mining companies.

I think flexibility is going to be really important for investors in 2023,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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