Surprises of 2023 Volume 4: Global Allocation, and the China Question

Bear markets in US and European equities bottomed in late 2022, when the gilts crisis in the UK triggered the world’s central banks to slow their hiking cycles. The equity risk premium in Europe has made a dramatic more-than-mean-reverting move from very wide to very narrow, which spectacular equity returns, as we predicted. That’s over, so there is no case now for European equities. The US equity risk premium has widened somewhat as stocks have rallied and bonds rallied more, as we predicted. We think that will continue in 2023. The only large market with a wide risk premium now is China. While the Taiwan question is a black swan, there is a long list of favorable fundamentals. We are skeptical of the deglobalization narrative, but it could have no near-term effect anyway. Positives include opening up from “Zero Covid,” cheap Russian oil, no inflation problem, and a central bank that is easing while all the others have tightened.