Global Equity Markets Commentary

“Are we there yet? From rates to growth…”

Looking forward to the rest of 2023, it is important to assess whether we have reached a turning point in the markets as the focus shifts from rates to economic growth. For this, investors are faced with three key questions. First, what type of recession is the market preparing for in terms of timing and depth? Second, what trajectory will inflation follow over the coming months and are we at risk of stagflation? And third, how will corporate earnings hold up under these conditions?

While investors appear to have largely made their peace with the banking sector’s temporary crisis of confidence the speed of monetary policy post-Covid has highlighted specific pressure points. The mismatch between liabilities and assets at certain specialist US banks has not spiralled into a systemic risk, the quick conclusion to First Republic’s issues made it possible to avoid renewed fears regarding US bank deposits, while Credit Suisse has been all but underwritten by the Swiss government via UBS. And while confidence has been damaged, European banks have liquidity coverage ratios of 160% and net stable funding ratios of 130%1 and are still, for now, benefiting from the lagged impact, compared to the US, of the interest rate cycle. However, the episode neatly highlights how protracted the process of adjusting to rapidly rising interest rates can be across the global economy.

Recessionary clouds

In a period of monetary policy adjustment, the financial sector becomes the primary mechanism of transmission. In the US, M2 money supply has contracted for eight straight months and the impact of such contraction generally has a lag of between four to six quarters. In a context where “money has a cost again” industries and consumers will ultimately be impacted, although in an initial phase of inflation deceleration, real income will improve and support consumption.

Some economic indicators are also deteriorating, albeit slowly. The latest manufacturing PMIs (Purchasing Managers’ Indices) in the US, Eurozone, UK, and China all declined by 1 point in their latest readings, with the US firmly in contraction at 47.1. US jobs numbers similarly show that while unemployment remains at a multi-decade low, the pace of hiring is decelerating. However, while all lead indicators are pointing down, the “time to impact” – in terms of potential recession – is being delayed by excess liquidity injected during the pandemic. At the same time, with China reopening, and India continuing to grow healthily, we see, as so often in the past, a divergence in growth paths between the two Asian behemoths, and the G7 economies, which are stagnating. Indeed, looking at growth recorded by China and India in Q1 2023, we expect that they will contribute 50% of world’s economic growth in 2023.2 So, while there are some contradictory signals, with equity markets remaining relatively buoyant in the face of an inverted yield curve that is often an omen of recession, the outlook remains cloudy. While the major economies have managed to shrug off the danger of recession in 2023, the prospects for 2024 are much less clear.

Inflationary environment

Softer economic data has combined with easing inflation numbers. In the US, the consumer price index (CPI) for March rose 5% year on year, easing to its lowest level in nearly two years. Recent financial stress has further reduced banks’ willingness to lend, with European bank lending falling 22% in Q1. As a result, market participants now expect the US Federal Reserve to start cutting interest rates as early as September, with a peak of 5% in June.

Yet with core CPI (which strips out volatile energy and food costs) rising 5.6%, there is reason to believe that price pressures for services will remain resilient, even as economies potentially begin to slow, especially with wage demands and labour costs, a lagging indicator, rising in many sectors. The risk of stagflation cannot be ignored, and central banks thus continue face the difficult task of determining a policy stance that is sufficiently restrictive to lower inflation, yet not so high as to risk financial stability. And, of course, given so many unknowns, there is the risk of a policy mistake. The market currently views erring on the dovish side as most likely, pricing in a rate cut by July of this year with further easing to come.

The rhetoric from central banks so far suggests that policy makers will still want to see clearer signs of inflation decelerating before pivoting. Indeed, in the Eurozone, prices rose 7% in the year to April, compared with a rise of 6.9% the previous month – the first rise in six months – while core inflation fell marginally to 5.6%. Weighing the risk of a policy mistake, central banks may still take the view that recession and significant damage to labor markets is the necessary price to pay to mitigate cyclical inflation.

Corporate earnings

At a corporate level, aggregate earnings revisions remain negative – Q1 earning have been cut sharply, with consensus estimates of -10% in Europe and -8% in the USA. While the pace of negative revisions has slowed from the depths of Q4 22, market participants have been quick to punish companies with lacklustre guidance. In the USA, close to 70% of companies have so far beaten Q1 EPS forecasts and income surprise has been at about 6% – higher than expected – while sales have beaten by 2%, pointing to a smaller than feared margin contraction in Q1. There, the technology sector has been the greatest contributor to the strength of this season.

The European earnings season is not as advanced with less than a quarter of the companies having reported. However, early indications are that results are following the pattern of the US with some room for a positive beat for net Income. Looking into the rest of the year, one topic recurrent with companies we meet is the prospect of the impact of higher labour costs even as raw material prices soften. For some companies, the game of margin preservation via price increases (or what some have dubbed greedflation) is a key component – the extent to which organisations can or choose to pass these pressures on without impacting volumes will be vital for margins going into H2. Given the asymmetrical impact of inflation on costs and revenues, companies that find themselves victims of such greedflation – where rising prices inordinately affect volumes – may struggle as a consequence. Clearly, the context of slower global economic growth will also weigh on results for the rest of the year although there is still room for possible positive surprises which will support stock pickers. For example, China’s continued reopening and positive early growth figures from India may offer some mitigation.


Persisting uncertainty on these fronts continues to create volatile equity markets. Recession seems to be looming, but leading indicators may be giving us lagged predictions due to extreme monetary policy at the height of the pandemic. As investors shift their focus from inflation and rates to recessionary pressures, key for their portfolios will be keeping strong companies across the style spectrum, with an emphasis on quality, dividend, sustainability, anchored around reasonable valuations and long-term structural trends. Understanding margin resilience for the rest of 2023 is critical as volatility around the US debt ceiling and US elections will also arise. Particular themes which we believe remain attractive include profitable technology and selective industrials – such as those companies benefiting from reshoring, automation, or climate solutions. Consumers real income should also appreciate in an environment of slowing inflation albeit dependent on economic growth or lack thereof. China’s historically counter-cyclical economy also continues to present selective opportunities.
  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies:

    Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).


Recent insights

Embracing Disruption

The “Internet of Things” (IoT) has made strong progress over the past decade, with connected devices now commonplace across both households and industry. However, in terms of the promises of IoT translating into tangible productivity gains, we have seen some bumps in the road to wider adoption, not least among systems providers seeking sustainable models for monetizing this quickly developing technology.

Discover more

Navigating Rates

Many of the major central banks (excluding Japan) are beginning or set to begin interest rate-cutting cycles this year. Here are four fixed income themes we believe could present investors with opportunities during the remainder of 2024.

Discover more

Modi’s victory, and the continuation of the reform agenda his government has embraced, should further strengthen the trajectory towards an ‘Emerging New India.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.