Investment Newsletter – November 2022
Confronting the spectre of stubbornly high inflation, central banks in advanced economies and many emerging markets have had to move to an accelerated path of monetary policy normalization to prevent inflationary pressures from becoming entrenched. As an intended consequence of monetary tightening, global financial conditions have tightened in most regions.
Global financial markets have shown strains. Asset prices have sold off on the back of continued energy market pressures, emerging stress in cross-currency funding, and stress in certain nonbank financial institution segments. At the same time, market liquidity has deteriorated across key asset classes. There is a heightened risk of rapid, disorderly repricing which could interact with and be amplified by pre-existing vulnerabilities and poor market liquidity.
Recession, for one. Weeks of earnings downgrades and a looming downturn suggest the stock market bottom isn’t in quite yet. With inflation as high as it is, a Fed pivot by Chair Jerome Powell means he will end up emulating his 1970s counterpart Arthur Burns rather than 1980s Chair Paul Volcker. Inflation will bottom well above 2%, leaving the Fed in a bind over the longer term. Eventually, it will have to take rates much higher and longer. It is also important to take note that bear markets will remain after the Fed pivot.
The 20th congress report calls for strengthening “mechanisms for countering foreign sanctions, interference, and long-arm jurisdiction.” Beijing has long been concerned about, and critical of US economic sanctions, but this is the first party congress report to directly mention sanctions in the context of China’s national security. The inclusion of sanctions in the report likely reflects the fact that Washington’s success in inflicting serious economic pain on Russia over its invasion of Ukraine has deepened Beijing’s desire to boost China’s self- reliance and shield the Chinese economy from the worst impacts of sanctions. The report’s dire warnings and prioritization of national security suggest that Xi JinPing is trying to prepare the party and the people to batten down the hatches and trust in his leadership as he steers China through what he describes as “high winds, choppy waters, and dangerous storms.”
Furthermore, China’s ambition and achievements in technology have received much attention around the world over the past decade. Less noted but perhaps equally remarkable has been the rise of aerospace business executives in the Chinese political leadership. A new term, “the cosmos club” (航天系 or 宇宙幫), has recently been coined to refer to the distinct cluster of technocrats who have risen through the ranks of China’s space and aviation industries to the national and provincial levels of leadership.
