We are getting ready to leave behind a year full of surprises, in which Borsa Istanbul marked the best performance in its history (a 110 percent increase in dollar terms), while other financial options caused real losses with returns under inflation.
While these were happening at home, we witnessed a completely different course in global markets.
The dominant theme in the world economy in 2022; economic slowdown, rising inflation to historical levels and accompanying rising interest rates.
The Ukrainian war was recorded as the trigger headline of this theme.
In natural selection, there is a parallel course between economic activity and interest rates.
When economies slow down, central banks reduce interest rates to create a parachute effect, that is, to support the economy, and when the economy recovers, they increase interest rates to prevent demand-side inflation. This does not reverse the direction of economic recovery, but softens its pace.
Contrary to the natural selection I have summarized above, 2022 witnessed extraordinary realizations.
The world economy experienced a similar situation in the 1979 oil crisis.
Global inflation climbed to historic levels in 2022 as the Ukraine war spurred energy prices.
As the economies slowed down, central banks had to go to hard rate hikes.
The FED increased the policy rate from 0.25 percent at the beginning of the year to 4.5 percent at the end of the year.
As such, the slowdown gained momentum and economic activity bottomed out in the last quarter.
This will continue in the first quarter of 2023.
We will witness the economy shrinking in many countries, albeit at moderate rates.
While the stock markets priced this theme with a 40 percent loss in $ terms in the first nine months of the year, the indexes turned up in the last quarter and the 2023 pricing came to a head.
However, although the stock markets managed to recover one third of the loss in the October-December track, the $-based loss of the world stock markets in 2022, which has 4 trading days to complete, is still 25 percent.
It was the worst performance in the last 14 years.
Today in Compass, I will share with you my expectations for 2023 and beyond, without prolonging yesterday.
First of all, I should state that I think that the dominant theme in the world economy and global markets next year will be the opposite of 2022.
I think that as of the middle of 2023, the economies around the world will return to the growth path and inflation will decrease throughout the year.
Just like in 2022, it is highly likely that we will encounter a course contrary to natural selection for a few years.
I am of the opinion that in the 2023-2025 period, as the economies recover, we will encounter a picture where central banks cut interest rates (because inflation has decreased).
While the economies are growing, the decrease in interest rates will be a catalyst and will accelerate the recovery.
There is no doubt that central banks will not be in a hurry to cut interest rates.
In fact, in the first quarter of 2023, we will witness that they raise the interest rates a little more.
It is highly likely that the rate cut cycle will begin at the end of 2023.
Although some remnants of global inflation will remain, I think it will move away from current record levels and converge to normal in the next two years.
In summary, I think that we are approaching a period in which economic activity will gain strength throughout the world for 2-3 years from the middle of 2023 and central banks will accompany this by lowering interest rates.
In the last quarter of 2022, both stock market indices and precious metals turned up the course due to this expectation.
Just as financial markets priced the bad before, they now started to price the good before it happened.
Moreover, the return from the bottom in the past three months was not only experienced in the asset markets.
We encountered a similar outlook to the stock markets in the last 3 months in the Manufacturing PMI, which is the most reliable indicator for the course of the economy in the next 5-6 months, and in the economic sentiment indices, which also produced very successful leading signals.
In the charts below, you can see the simultaneous return of both indicators from the bottom with the stock market indices.