Global Equities: Looking Toward a Soft Landing and Beyond

• As disinflation continues, rates are peaking and both GDP growth and earnings are surprising to the upside. There is potential for the equity rally to continue. The key risks stem from high interest rates and, in the long term, geopolitical challenges.
• In our view, performance is likely to remain desynchronized and risks and improvements impacting the global economy may come from different angles.

Despite the economic slowdown and tight financial conditions, global equities have performed well so far in 2023. This equity segment has risen 11.5% as of 25 August, recovering part of the 18.4% loss endured in 2022.¹ Risks stemming from elevated interest rates and geopolitics remain. However, as monetary policy and supply chain easing are binding inflation down, while labour markets remain robust, a soft landing is becoming an increasingly probable scenario. 

Volatility is likely to persist, but the pullback we observed in August may turn into an opportunity to take a position in global equities, particularly for investors with a mid- to long-term investment horizon. Indeed, over the past 10 years, global equities delivered strong performance compared to other asset classes, despite multiple shocks.

Economic Growth has Been Better than Feared

Economic slowdown was one of key concerns as investors went into 2023. And while elevated interest rates will continue to weigh on growth prospects, the global economy has so far been more resilient than investors might have anticipated. 

Indeed, Q2 brought better-than-expected GDP numbers from the US, which grew by 2.1% SAAR, or above the 2.0% market expectations. Japan delivered 6.0% SAAR growth in the second quarter, smashing the 2.9% estimate, driven by exports. Europe is seeing flat growth but, against expectations, the continent has managed to avoid recession for the time being. China has been a clear disappointment this year and we acknowledge risks related to the real estate and financial sectors. At the same time, we see the gradual recovery of Chinese consumer demand (as noted during the Q2 earnings season) and the ability to inject fiscal or monetary stimulus if necessary. 

All in all, from the end of last year, the consensus expectations for global economic growth improved from 2.1% to 2.7% for this year and moderated from 2.9% to 2.7% for 2024. The balance of GDP growth has also shifted to the developed world, where most global equities reside.²