The central economic themes in 2023 have been economic slowdown and inflation. As well as post-pandemic recovery efforts. These challenges are directly correlated with China’s economic performance – and its development – whose effects are inevitably transmitted throughout the world by virtue of its economic and geopolitical influence. Despite the fact that the war in Ukraine is very painful and costly, mainly due to the loss of human lives, it is not the most important problem -from the economic and financial point of view- that the world will face during this second quarter of the year.
However, and although it seems unlikely, we cannot rule out a nuclear escalation in hostilities. There is the remote possibility that an increasingly cornered Putin unleashes a catastrophe of apocalyptic proportions.
Unfortunately, and it is enough to take a look at the history of armed conflicts, to put aside the idea that Ukraine and Russia will reach an agreement soon. The stakes are high, and neither government is going to budge. The war will most likely continue, but don’t be surprised if we see the start of ceasefire talks.
If the latter is the case, the war will continue – with its catastrophic effects – and alliances and relationships will fragment as economic interests diverge, which could even ease the pressure in some places. George Friedman, a renowned expert on geopolitics, has said that “the tensions created by the competition between the United States and China will shape, at least in part, those interests, even as Beijing and Washington reach some kind of formal economic understanding and informal military understanding”. We agree with this analysis.
In this sense, the International Monetary Fund has already pointed out that a “fragmentation” of the global economy into competing blocs would harm world economic growth – but that is exactly what is happening. “The lesson from Ukraine was that Russia’s energy dependence was probably a mistake,” said British Foreign Secretary Jeremy Hunt. “We want to make sure that not only energy dependency is addressed, but also technology dependency, critical mineral dependency, all kinds of other dependencies,” he noted. The world is splitting into blocs led by the United States and China.
Perhaps Fed members will consider pausing rate hikes at their next meeting if more evidence of cooling inflation emerges. However, Jerome Powell’s plans to curb his inflation fight could be complicated if there is a recovery in China, as it has already been. Those who are joining in buying risky assets watching the recent rally in stocks are forgetting the cardinal rule of investing: “Don’t fight the Fed.” Morgan Stanley strategists have already explained it to their clients: The movement of stock indices is mainly driven by seasonal factors, rather than by convincing data that inflation has “has peaked”.
That reopening is inducing a boost to global growth, offsetting weakness in Europe and a looming recession in the United States. There are also signs that China’s recovery is gaining momentum. Recent data showed corporate purchasing indices re-entering expansion territory.
In this sense, we reaffirm what was said in this space a couple of months ago: China-led economic growth will lead the Fed to raise interest rates more for a longer time. This, combined with weak quarterly reports (so far they have been mixed), and high unemployment rates, will inevitably lead to a recession and a correction in the markets. All this, before entering the long-awaited recovery or “bull market”.
The assets that perform best in these situations are safe havens: such as the US dollar, the Japanese yen, gold, silver, or short-term government bonds. Special cases are “alternative investments”, such as art or private equity. It can also be argued that during the rest of 2023 there will be better performance in markets outside the United States (such as China), especially in emerging economies that export raw materials.
But the king of safe-haven assets during periods of recession or stagflation has historically always been gold. The performance of gold, and mining stocks in the current chaotic environment, reaffirms the belief in the role of gold as a possible “safe haven” investment. Gold is near its all-time high today.
Gold marked a new high for the year on March 20, trading at $2,009 an ounce. This rally represented a move of $200 from its monthly low of $1,809 on March 8. Gold rose as markets tried to digest the news and gauge the ripple effect of the rapid collapse of Silicon Valley Bank and Signature Bank over the course of a weekend. The metal found more support as risks spilled over to Europe, with top bank Credit Suisse finally needing a bailout, which included the surprise removal of $17bn of the bank’s AT1 bonds.
Panic and fear subsided as governments, regulators and central banks around the world intervened and/or reassured investors in an effort to restore market confidence.
In parallel, central banks hoarded gold at the fastest rate on record during the first two months of 2023, according to a report by Krishan Gopaul of the World Gold Council (WGC). In January and February, central banks collectively bought 125 net tons of the metal, the highest amount so far this year since banks became net buyers in 2010.
Accumulating gold and gold stocks is prudent and wise at this time. Especially when the signs of a recession are starting to flicker.
Here, the continuation of the list for the January delivery, of different relevant trends for the coming year: a) Biomimicry: Design approach that seeks to imitate the patterns and structures found in nature to create more sustainable products and systems and efficient; b) Circular economy: Production and consumption system that prioritizes the reuse and recycling of materials; c) Cyborg technology: used to enhance and augment human capabilities, for example through wearable devices, implants, and other forms of human-machine interface; d) Preventive, Alternative, and Personalized Medicine: Products made from plant-based materials that are gaining popularity as consumers seek organic and anti-aging options. Likewise, advances in genomics and other areas of biotechnology are making it possible to develop more personalized approaches, tailored to each patient’s unique genetic makeup; e) Clean Energy: As the world continues to face the challenges posed by climate change, increasing attention is being paid to the development and adoption of sustainable energy sources, such as wind, solar and hydroelectric; f) Edge computing: Technology that involves data processing on different servers and thousands of devices connected to each other, instead of in a centralized data center; g) Augmented reality: creation of digital representations of physical objects and systems, allowing the simulation and analysis of real world systems in a virtual environment; h) Smart Cities: Cities around the world are exploring ways to harness technology to improve the quality of life for their citizens, from reducing traffic congestion to improving public safety and access to public services.
Twitter: @EduardoTurrentM
