Manulife Investment Management (IM) expects a synchronized global growth downturn next year following the aggressive pace of financial tightening in 2022 that would impact the equity and debt markets.

In a statement, Sue Trinh, co-head of global macro strategy at Manulife IM, said monetary tightening this year and its associated lagged effects are expected to drive the economic downturn through 2023.

“Amid a macro backdrop characterized by elevated global inflation, uncertainty over when Fed rates might peak, and rising odds of a global recession, the first half of 2023 could bear witness to a series of sharper and longer bouts of market volatility,” Trinh said.

This year has been a year filled with challenges for many investors, Trinh said, citing the Russia-Ukraine issue, lingering pandemic-related disruptions, the highest inflation in several decades, a broad-based, among others were key factors that impacted equity and debt markets in 2022.

“Overall, most advanced and interest-rate-sensitive economies will experience recessions in the first half , while Asia may see a slow-motion recovery due to a fuller economic reopening in mainland China, Hong Kong SAR, Japan and the Taiwan market.” Trinh said.

“Improving sentiment with a bias towards more defensive assets near term is likely to bring about continued outperformance of investment-grade bonds and a noticeable rebound for high-yield assets,” she added.

However, Trinh said the picture does brighten slightly in the second half of 2023 as headwinds are likely to moderate, ushering in more conducive conditions for financial markets.

“Our base case is that the looming negative demand shock would be sufficient to see growth concerns overtake worries of inflation, and that could pave way for the Fed to take a dovish pivot and potentially ease rates during the fourth quarter of 2023,” Trinh said.

“The main risks to our base case are around the timing of the stagflation trough, China’s full reopening and the USD’s peak,” she added.

Ronald Chan, Chief Investment Officer, Asia ex-Japan equities at Manulife IM, said they have seen signs of a rebound in the mainland China economy given the government’s lifting of some Covid-19 restrictions.

“China will be one step closer to a rebound when we see further loosening of prevention measures and decline in confirmed cases within the country. We expect the upcoming Central Economic Work Conference will release more supportive policies in terms of fiscal and monetary sides, which will be a positive sign for the equity market,” Chan said.

“We are also positive on longer-term thematic investments, including advanced manufacturing, machinery and semiconductor, which we could potentially see a rise in local demand,” he added.