MacroVoices #360 Viktor Shvets: Inflation, Interest Rates, Equity Outlook & more
Macquarie's Viktor Shvets discusses his expectation that geopolitical tensions will simmer but not escalate significantly in 2023-24, predicts inflation will drain away without requiring demand destruction, and sees the global economy skirting recession with modest equity returns ahead.
Summary
Viktor Shvets presents a comprehensive analysis of the global macro environment for 2023-24. On geopolitics, he argues that while tensions remain high, the probability of major conflicts has actually decreased due to lessons learned from the Ukraine war. He believes both the Russia-Ukraine conflict and Taiwan tensions are more likely to simmer than escalate, as neither Russia nor Ukraine can achieve decisive victory, and China needs time to retrofit its economic system against potential sanctions. Regarding inflation, Shvets presents a nuanced view that we live in neither the disinflationary 1990s-2000s nor the inflationary 1970s-80s, but rather face alternating periods of inflation and disinflation similar to the 1930s. He identifies strong disinflationary forces (technology, demographics, inequality, financialization) offset by periodic inflationary spikes from 'black swan' events. He expects inflation to drain away in 2023 without requiring demand destruction, as the current inflation stems from supply disruptions rather than excess demand. For interest rates, he predicts they will fall over the next two years and sees the current cycle highs as already behind us, driven by underlying disinflationary pressures and economic constraints. On GDP and recession risk, Shvets outlines three scenarios with his base case being 'skirting global recession' with 1.5-2% global growth - neither a soft landing nor deep recession. He expects earnings per share around zero growth but sees limited systemic fractures in the financial system. For equities, this translates to his S&P 500 target range of 3,600-4,000, with downside protection from falling interest rates offsetting modest earnings disappointments. On China's reopening, he anticipates initial demand weakness in Q1-Q2 2023 followed by strong 7-8% growth in the second half, though focused more on consumption than infrastructure, limiting commodity market impact.
Key Insights
- Shvets argues that geopolitics is a process rather than an event, taking time to unfold, and investors should focus on identifying periods when tensions simmer versus explode
- The strategist believes neither Russia nor Ukraine can achieve decisive victory, leading to eventual stalemate with dotted lines drawn on maps rather than resolution
- China's Taiwan invasion probability has decreased because Ukraine war taught China that Taiwanese will fight, they'll be well-armed, and China needs time to retrofit its economic system against sanctions
- Current inflation resembles the 1930s pattern with both inflationary and disinflationary forces rather than the consistently disinflationary 1990s-2000s or inflationary 1970s-80s
- Shvets contends that de-globalization is not inflationary because labor represents a smaller cost component, emerging market labor costs have risen, and re-industrialization is based on automation rather than labor
- The analyst expects inflation to drain away without requiring demand destruction because it stems from supply disruptions rather than excess demand, with most countries still below pre-COVID trajectories
- Interest rates have likely seen their cycle highs and will fall over the next two years due to underlying disinflationary pressures from demographics, technology, inequality and financialization
- His base case 'skirting global recession' scenario implies 1.5-2% global GDP growth, leading to roughly zero earnings per share growth but avoiding major financial system fractures
- The S&P 500 should trade between 3,600-4,000 in his core scenario, with falling interest rates and equity risk premiums offsetting modest earnings disappointments
- China's chaotic reopening will initially depress demand in Q1-Q2 2023 but could drive 7-8% growth in the second half as consumers draw down accumulated savings
- Chinese growth will likely focus on consumption rather than infrastructure and real estate to avoid further deterioration in capital efficiency, limiting commodity market impact
- The probability of policy errors is very low currently, with the three key risks being healthcare disruptions, geopolitical flare-ups, and China's recovery trajectory rather than central bank mistakes
Topics
Full transcript available for MurmurCast members
Sign Up to Access