(Source: Merlea Macro Matters)

Summary

Investors can expect “some light after the storm” in 2023, however inflation, geopolitical uncertainty and intensifying economic divergences will still be the main themes.

Our baseline expectation for 2023 is for a recession in the U.S. and other leading economies, primarily because central banks will need to continue to raise rates to help quell inflation. In the United States, that would likely entail inflation falling but remaining above 3% and short-term interest rates landing around 4%—no soft landing, but no stagflation either.

We will likely see more market volatility in the months ahead. Markets want to believe that central banks will blink and change direction, negotiating the economy towards a soft landing. But in our view, a hard landing remains the most likely outcome for the US in 2023. The previous norm of central bank “whatever it takes” intervention during the financial crisis and the pandemic is going or has gone.

Until markets absorb this fully, we could see sharp rallies on the back of expected action by the Fed, only for them to reverse when it doesn’t materialise in the way they expect. Rates should eventually plateau, but if inflation remains sticky above 2 per cent, they are unlikely to reduce quickly even if banks take other measures to maintain liquidity and manage increasingly challenging debt piles.

A key factor to watch is where the US dollar goes. If the Fed continues to raise rates, an even stronger dollar could accelerate the onset of recession elsewhere. Conversely, a marked change in the dollar’s direction, potentially as its relative strength and confidence in monetary and fiscal policy making become an issue, could bring broad relief, and increase overall liquidity across challenged economies.

Other parts of the world are on different trajectories. Japan has so far maintained looser policy settings; but any shift away from its current yield curve control could lead to unintended consequences for the yen and potentially add another layer of risk to the already elevated levels of volatility in foreign exchange (FX) markets.

China too has taken a different pathway in 2022, thanks to its zero-Covid policy and the reining in of its property market. In the next 12 months, we expect policymakers to continue to focus on reviving the economy, investing in longer-term areas such as green technologies and infrastructure. Any loosening of Covid restrictions will cause consumption to pick up. The deglobalisation that has arisen from the pandemic and tensions with the US will take time to work its way through but is a theme that will grow.

We enter 2023 underweight equities, albeit with lower conviction. We are broadly neutral on duration but with an appetite to add duration on weakness and to increase our exposure to high grade credit, particularly at the short end of the yield curve. The prospect of a softer dollar as well as better valuation support leads us to marginally prefer non-U.S. equity markets within equities, we lean away from U.S. stocks, given the better valuations in developed markets ex-U.S., while a softer dollar plus China reopening renews our interest in emerging market equities.

Bonds

The world economy needs to brace for a difficult new era when interest rates will be higher, geopolitical tensions greater and uncertainties more pronounced. Central banks aren’t giving up their inflation fight yet with the peak in interest rates still to come in most economies, but pauses will come at some point in 2023 — and perhaps even pivots. Just how high rates will go and when how long they’ll be kept there are among the biggest questions being asked by investors as the year begins.

For now, central banks aren’t ready to declare an end to their inflation fight. Decisions may become harder as rates move further into restrictive territory and risk constricting demand so much that economies topple into recessions.

That’s the worry of bond traders who are increasingly sceptical of the ability of central banks to keep hiking and then hold tight. Of course, central banks may still pull off fabled soft landings. Although the odds are against them, the Fed got a reason to be optimistic when the final labour market report of 2022 showed unemployment falling, payrolls rising and wage growth cooling.

The RBA is nearing the end of its tightening cycle after cementing its position as one of the most dovish central banks in the developed world. It pivoted to smaller quarter percentage-point hikes in October and gave itself maximum flexibility to manoeuvre by saying future moves will be data-dependent. Economists are predicting two more quarter-point steps in 2023 to take the cash rate to 3.6%.

After more than a decade of ultra-loose monetary policy and dormant price pressures, markets may be returning to a more ‘normal state’ with inflation and interest rates materially above zero. So, a different investing environment than we have been used to in recent years but one not without opportunities.

With yields now at decade highs and the bad news on interest rates largely reflected in prices, fixed income may now be able to fulfil some of its roles in portfolios once again. Our asset allocation view on bonds has turned more favourable. Yields have risen a long way as financial markets have adjusted to higher interest rates, meaning we started to become more positive on bonds from around the middle of the year, and are now dipping our toes back into conventional government bonds. With yields on most mainstream bonds now above the forward-looking inflation measures, the outlook for 2023 looks hopeful.

Listed Property

Australian Real Estate Investment Trusts (A-REITs) have been hit hard by last year’s sell off, underperforming the market by over 18%. The REITs’ rough run has mainly been driven by a sharp increase in the 10-year bond yield, which has more than doubled. However, we believe long dated government bond yields could be close to reaching their peak, and with the Reserve Bank of Australia (RBA) prioritising growth over inflation, this could provide a tailwind for REIT performance in 2023.

The RBA has started to temper the rate of cash rate increases over the past two months despite Australian inflation reaching a 40-year high in Q3 and expectations it will further increase in Q4 2022. The RBA increased the cash rate in October and November by 25 basis points, below market expectations of 50 basis point hikes on both occasions. REITs historically outperform during persistent inflation periods. The RBA is forecasting inflation to be above its target in 2023.

Commercial leases and contracts in office and logistics typically have inflation-linked annual increases in rents written into the contract, providing inflation protection on income. REIT performance is negatively correlated with bond yield movements due to the change in borrowing costs impacting property valuations. The increase in government bond yields year to date, due to rapid increases in the expected RBA cash terminal rate has been a major headwind for REIT performance.

However, long dated government bond yields could be close to reaching their peak. Broker consensus is Australian Government bond 10-year yields will remain at similar levels over the next two years. Bond markets have priced in expected further RBA cash rate increases and there is a chance the RBA starts cutting the cash rate in late 2023 as the global economy slows, putting downward pressure on government yields.

The reaction from property analysts has been a widespread de-rating of REIT valuation assumptions, leading to sector-wide target price cuts and a rethink on ratings. However, consensus has the sector being oversold after such a sharp move. Many REITs are now trading at significant discounts to their net tangible asset valuations, or at least their NTA valuations as last reported. REITs can also benefit from the current economic environment. The reason central banks need to increase rates is due to a strong economy with low unemployment rates and consumer demand causing high inflation. Given that most rents are tied to inflation, property managers will see a rise in income. From our research we found data suggesting that A-REITs have returned 7% p.a. in the past five RBA tightening cycles.

It is for these reasons we believe that property will bounce back in 2023 and outperform the broader market.

Australian Equities

Our central scenario is that the economy continues to grow moderately this year, with a continued reallocation of spending away from goods towards services including travel, with some reduction in discretionary purchases due to higher mortgage repayments and energy prices. Australia is likely to experience an earnings recession even if we do not suffer an economic recession. The reality is that the starting point for earnings is at a historically very high level. Although earnings have held up reasonably well until now, that’s largely because the impact of the rate hikes that we’ve seen domestically is only just starting to bite

We note that some of the heat appears to be coming out of the employment market already and some businesses are now seeing declines in key input costs from elevated levels e.g. Oil, Lumber and Base Metals.

Current market conditions are challenging for investors. Asset prices had benefitted from a long tailwind of falling interest rates that has largely come to an end, bringing unstuck investment strategies that were heavily biased to growth.

Companies are also facing a more difficult operating environment with uncertain demand and higher input costs. This is most evident among the gold and copper miners, who are dealing with lower prices for gold and copper at the same time as their costs are rising rapidly.

Alongside interest rate rises, the US Federal Reserve and the Reserve Bank of Australia have both indicated they will reduce the amount of bonds they hold on to their balance sheet. This will impact the valuations for stocks in general but is likely to impact the valuations of growth stocks more than value stocks. This paradigm is likely to persist through 2023.

Immigration and population growth are likely to accelerate, underpinning Australia’s long-term structural growth and providing an additional cushion against recession.

Despite the challenging environment, there are reasons for some optimism. China has begun to re-open, with the largest beneficiaries from reopening sits within the services sector given China is the largest consumer of Australian tourism and education exports, and Australia’s official interest rates may not reach predicted levels (even if they do, they are still low by historical standards).

However, we are learning to live with Covid. Although inflation is higher than usual, that can work in favour of equity markets if it remains reasonable.

The businesses that tend to do well during inflationary periods are those linked to commodities (both soft and hard), as well as essential businesses that have pricing power. The opposite is true for companies with no pricing power or offering fixed-price contracts. Businesses such as contractors and building companies with fixed-price contracts and rising input costs see their margins significantly squeezed through inflationary periods.

We think the companies that will do well in this environment are those with a strong competitive advantage and structural growth. These companies tend to have higher operating margins which can help insulate against rising input costs, along with an ability to pass higher costs on to customers.

While sectors such as essentials (supermarkets, healthcare), materials, insurance and financials are likely to perform well in 2023, a more challenging environment should provide investors with an opportunity to invest in inexpensive, high-quality businesses with long-term structural growth.

Global markets

America

There is good and bad news for equity markets and more broadly risky asset classes in 2023. The good news is that central banks will likely be forced to pivot and signal cutting interest rates sometime in 2024, which should result in a sustained recovery of asset prices and subsequently the economy by the end of 2023. The bad news is that in order for that pivot to happen, we will need to see a combination of more economic weakness, an increase in unemployment, market volatility, decline in levels of risky assets and a fall in inflation. All of these are likely to cause or coincide with downside risk in the near term.

After a year of macroeconomic and geopolitical shocks, investors responded by derating the S&P 500 price to earnings (P/E) ratio as much as seven times, while some speculative growth segments crashed 70-80% from highs.

Although fundamentals have been resilient throughout these shocks, this year’s constructive growth backdrop is not expected to persist in 2023. Fundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive. The economy is also likely to enter a mild recession, with the labour market contracting and unemployment rate rising to around 5%.

Consumers with a cushion of savings from lockdown have mostly exhausted their post-COVID excess cash and for the first time are getting hit by a broadening negative wealth effect from all assets simultaneously — whether that’s housing, bonds, equities, alternative/private investments or crypto the effect of lower savings should continue to gain momentum next year as consumers and corporates more meaningfully cut discretionary spending and capital investments.

Signs are also emerging that America will escape a prolonged recession in 2023. The latest data release from the Labour Department revealed that unemployment had fallen to 3.5%, a strong signal of economic health. And job openings remain relatively high – a factor that has helped keep the “shadow” U.S. unemployment rate relatively stable.

In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, pushing the S&P 500 to 4,200 by year-end 2023.

Europe

It does seem likely that inflation in Europe has passed its peak, although economists think it will take until March or April before it falls back significantly. The slippage in the value of the dollar, in which oil and gas are priced, will help, but the eurozone, like all areas of the world, is at the whim of global demand and prices. Inflation in the eurozone, even if it has peaked, has been more worrying than in the US, topping 10% just as America was turning the corner. Even Germany reached 11.6%.

Another challenge for Europe is its shrinking workforce as an ageing population outnumbers a birth rate falling in most countries below the death rate. Despite a counterbalancing from the flood of young refugees from trouble spots to the south and east, Germany and France are just about maintaining a stable workforce, while Italy is falling back sufficiently to be a cause for concern.

Then there is the debt to GDP ratio that indicates how well each economy can manage its national debt. While Germany’s ratio is below 100%, that of France is 113% and rising, while Italy’s is a worrying and potentially unsustainable 150% Investors to Europe will naturally be drawn towards Germany, which, despite its frantic race to wean itself off Russian gas, remains the strongest economy on the Continent. However, the best prospects could just be in France, Europe’s second-largest economy.

The year ahead will be better for European stocks than you may think as inflation peaks and rates normalise, although earnings are likely to fall in 2023, fewer macro risks and lower rate volatility should be supportive for equity markets.

United Kingdom

The war in Ukraine has compounded the battering endured by economies worldwide in the face of runaway inflation, soaring energy prices and continued supply chain bottlenecks. On the domestic front, recessionary clouds have intensified following a period of seismic political upheaval. In 2022, the pound sank to its lowest-ever value against the dollar in the wake of a calamitous mini-Budget, although it has since recovered its losses. The Bank of England is expected to raise UK interest rates again in coming months, with the bank rate hitting 4.5% mid 2023, from its current 3.5%. The outlook for the UK economy remains gloomy for this year, but the FTSE 100 is highly international in nature with around three-quarters of earnings made overseas.

The top end of the market has high exposure to sectors that have historically proven resilient in tougher times, including consumer staples – businesses making everyday items people continue to buy whatever the state of the economy – healthcare, and utilities. Areas to avoid include sectors sensitive to UK domestic consumption, including consumer discretionary stocks – such as those in the retail, hospitality, and travel sectors. Company valuations are low owing to widespread investor disdain. More importantly, the market may be underestimating the potential for dividend payouts to increase. Earnings are healthy, dividend cover [the ratio between a company’s earnings and the dividend paid] is high, and the make-up of the UK market, with its skew towards energy, commodities, and well-capitalised financials, should be resilient during a period of rising interest rates. Markets are forward looking. Although not yet officially in a recession, its occurrence has already been priced in. By the time the economy is growing again, the market will be recovering, and the buying opportunity will have passed.

Japan

Japan stands to benefit as more companies refocus on their home markets. Rising inflation could potentially break the cycle of disinflation and low wages, paving the way for the Bank of Japan (BOJ) to revise its accommodative policy. In addition to these macroeconomic factors, Japan’s emphasis on corporate governance reform could continue to help investors unlock value in 2023.

In terms of Japan’s macroeconomics, it will be increasingly important to monitor the cumulative effect of higher inflation in 2023. In the US and Europe, surging prices are an economic threat and their central banks are focused on deflating aggregate demand to combat decades-high inflation before it goes out of control.

On the other hand, for a country which suffered from the so-called “lost decade” following the bursting of the economic bubble in the early 1990s and a deflationary period in the early 2000s, inflation may not be entirely bad for Japan. This is because inflation has the potential to break the vicious cycle of disinflation and low wages, which is a chicken-and-egg problem.

The belief that inflation by nature is by a self-fulfilling prophesy and, therefore, inflation expectations need to be raised for the actual inflation rate to move up. For inflation expectations to be positive (ideally close to 2%), there will have to be an exogenous shock that becomes a catalyst; the recent rise in import prices may therefore be what Japan needs.

While Japan’s inflation rate is still low relative to that of the US and Europe, we are finally starting to see signs of inflation expectations rising in line with actual inflation. According to a survey conducted by University of Tokyo professor Tsutomu Watanabe, people appear to have become more resilient to an increase in the level of prices. The “Shunto” or “spring wage offensive” will be launched each spring in Japan, with company management teams and labour unions engaging in wage negotiations for the coming fiscal year starting in April.

Prime Minister Fumio Kishida has called for higher wages in his “new form of capitalism” economic agenda and considers wage hikes to be critical in creating a virtuous cycle of growth and distribution.

Labour unions are also becoming aggressive in calling for higher wages. Ahead of the coming negotiations, RENGO, the largest national trade union centre in Japan, is calling for a 5% wage hike, while the Japanese Federation of Textile, Chemical, Food, Commercial, Service and General Workers’ Unions (UA ZENSEN) is calling for a 6% hike. Wage hikes could also pave the way for the BOJ to pivot from its current accommodative policy. After serving as BOJ governor for the past decade, current chief Haruhiko Kuroda’s term will end in April 2023, and his successor could be in a position to tweak monetary policy.

One thing to consider for 2023 regarding the Japanese economy is that it is at a different stage of its economic cycle than its peers. As such, the GDP may grow beyond its long-term trend rate in 2023.

Moreover, corporate earnings look good too. In 2022, most quarterly results announced have been above market expectations.

China

Chinese shares are off to a strong start in 2023, putting behind a dismal year as fears of isolationist policies give way to signs of turning friendlier to both the outside world and its own entrepreneurs.

The MSCI China Index has risen 5.8% since trading resumed, marking the best start to any year since 2009, after losing nearly 24% in 2022. Top gainers included property developers and technology firms. The Nasdaq Golden Dragon China Index surged 13% in the same period, making it the best start on record.

Investors have been revived by China’s pivot away from its zero-Covid policy, the ending of its crackdown on tech companies and Beijing’s renewed commitment to growing economy. China rapidly unwound its strict zero-Covid policy and he country reopened its border to foreign travellers for the first time in nearly three years. This shows China is now focused firmly on growing its economy, Covid lockdowns had  depressed demand and a debt crisis in its real estate sector.

Amid increasing hostility among some Chinese citizens to zero-COVID policies, China moved more rapidly with abrupt termination of zero-Covid policies. This could be disruptive for the economy and markets, making it challenging to see if consumption would improve or be further curtailed by residents fearful of either being infected or by haphazard reversals of easing resulting in new lockdowns. The positive outcome from China’s unexpectedly rapid dismantling of Covid restrictions has paved the way for a faster-than-anticipated economic reopening. However, the reopening will be “bumpy,” they said, as the country grapples with a surge in infections that already appears to be peaking in certain areas…

The Chinese government hopes that by ending its crackdown on tech companies, which it began in 2020, it can help provide that much-desired boost to the economy and employment.

At a key policy meeting in December, top leaders also indicated they would introduce new measures to improve the financial condition of the ailing real estate sector and boost market confidence. China’s economic growth will get back on track despite facing challenges in its transition to an optimized COVID-19 strategy. The Chinese economy will pick up substantially, and its growth will reach around 5.5 percent in 2023. Despite the recent surging COVID-19 cases in the nation, it is expected China will be returning to normalcy in the second half of this year.

China’s recovery will lift global growth for the simple reason that China is a big part of the world economy. HSBC reckons that one year from now, in the first quarter of 2024, China’s GDP could be as much as 10 per cent higher than it will be in the first three troubled months of 2023. A rough calculation by The Economist says a recovering China could account for two-thirds of global growth in that period.

China is probably one of the cheapest emerging markets in the world and has a strong potential for a strong rebound. We believe the momentum toward reopening bodes well for the investment outlook over a six- to 12-month horizon.

Emerging markets

The good news, however, is that EM inflation is around its peak and should start to fall back during the course of 2023. That takes the heat off central banks, and means the rate-hike cycle is coming to a close, so growth headwinds may ease as policy rate hikes halt.

The impact of sharp increases in commodity prices after Russia invaded Ukraine in early 2022 will start to reverse as base effects in food and energy inflation become more favourable. And a combination of tighter policy and slower growth will weigh on core pressures.

Easing inflation will start to relieve pressure on real incomes and probably allow some central banks, notably in Latin America, to begin lowering interest rates again in the second half of the year, setting up a cyclical recovery as we head into 2024.

Economic growth is likely to increase in EM during 2023, driven by higher China, Hong Kong, and Thailand, as well as resilient growth from the Middle East. In contrast, DM GDP is expected to decline to very close to zero. As a result, the gap between EM and DM GDP growth is likely to widen from 1.0% in 2022 to 3.5% and 3.0% in 2023 and 2024 respectively. This sets a strong backdrop for EM asset prices, even if the gap between EM and DM widens by a smaller magnitude, as forecasted by the International Monetary Fund (IMF) in its latest World Economic Outlook in October 2022.

EM companies have debt-to-equity ratios of just 1.5 times earnings, far lower than their developed-market peers. The MSCI EM Index trades at about 10 times forward earnings estimates, compared with 17 times for the S&P 500. Valuations remain attractive vs. history and developed markets, profitability, free cash flow, and dividend yields have all moved higher, and earnings growth is expected to recover in 2023.

While 2023 is set to see the global economic backdrop remain challenging, EM stock market performance is likely to behave very differently. We expect to see three positive inflections next year: US monetary tightening, Chinese mobility constraints, and lower global inflation. An improvement in these global drivers should improve sentiment and allow EM equity multiples to rerate from current depressed levels. Meanwhile, EM earnings expectations have already been revised to prudent levels, which should see greater price stability and the prospect for positive surprises. This leaves EM equities well-placed to deliver strong absolute returns and to outperform developed markets.

Commodities

China’s reopening will be a key variable in global commodity markets this year, after multiple commodities set historical highs in 2022, driven by the Ukraine war and sharp inflation, more broadly. While analysts’ predictions range from bullish to bearish, one thing that they agree on is that most commodities are unlikely to soar above the level they reached last year. The majority of the commodity deflation came from central bankers raising the cost of capital and draining market liquidity, both physically and financially, which is not a long-term fundamental solution. Without sufficient capex to create spare supply capacity, commodities will remain stuck in a state of long-run shortages, with higher and more volatile prices.

As China reopens, the demand for metals, crops and energy will help exporters of commodities, hurt importers and give the world’s central banks another headache in their fight against inflation.

China’s demand for metals remained strong during zero-COVID, but buyers lacked the confidence to stock up: inventories of copper fell to their skimpiest in 15 years. Reopening will encourage restocking. In November Goldman Sachs reckoned the price of copper would increase to $US9000 per tonne within 12 months. Now it thinks the price will reach $US11,000.

Gold

As a hedge against uncertainty, gold is expected to have quite an active year in 2023. There are many risk events already on the calendar for the next 12 months, and then we have to consider the unforeseeable events that could shake up markets. There are also a series of expected changes in both monetary and fiscal policy that could change the direction of the price in gold.

For the moment, gold is getting support from two main sources: The weaker dollar as the Fed slows down the pace of its interest rate hikes. And central banks around the world are buying up gold going into the end of the year. The reasons for the latter are harder to parse, because central banks are notoriously tight-lipped about why they are investing in safe havens. One of the more common explanations is the assessment that gold is undervalued in the current market and would likely appreciate at least in the coming months.

In general, when the U.S. dollar strengthens, commodities become more expensive in terms of other currencies, a situation that can lower their demand and thus prices in global markets. In addition, when real yields rise, the opportunity costs increase of holding assets that don’t pay interest or dividends, such as precious metals, leading investors to seek better returns elsewhere.

Gold’s outlook, will improve this year as tightening financial conditions begin to trickle through the real economy, reinforcing downside risks for both the U.S. and global economy. Monetary policy acts with a long and variable lag, suggesting that the full negative impact of the Fed’s hiking cycle has yet to be felt. When the detrimental effects start to be more apparent before the quarter ends, defensive assets could benefit, bolstered in part by safe-haven flows. When these events play out, gold prices could stabilise and stage a more durable recovery throughout 2023.

WTIS

OPEC remains steadfast in its commitment to higher crude prices through aggressive supply management. OPEC shocked consumer nations in October with its decision to cut 2 million barrels a day from the global supply, and the cartel now seems ready to act if prices threaten to fall below $90.

Saudi and other OPEC members need the revenue. The International Monetary Fund estimates that Saudi Arabia needs an oil price of $67 a barrel to balance its budget, but that figure could be as high as $80. Regardless, Riyadh wants to maximize the value of its oil reserves while it can as the West seeks to transition to cleaner energy options.

Russia, the lone heavyweight among the expanded OPEC-plus producer group, needs oil revenues even more as it persecutes a war in Ukraine that remains unpopular at home and abroad. Escalating Western sanctions against Russia offers another bullish wild card for oil markets.

EU embargoes and a related G7 price cap on Russian oil sales will take time to impact prices, but experts see the effect hitting in the first quarter of 2023 when the EU ban expands to include refined Russian products on Feb. 5. The International Energy Agency (IEA), which expects global oil demand to rise by 1.7 million barrels a day next year, forecasts worldwide oil production to rise by just 770,000 barrels a day. That 1 million barrel-a-day deficit will force consuming nations to draw down already critically low inventories.

The situation speaks to the chronic underinvestment problem oil executives have been warning of for the past couple of years, as capital expenditures in new supply projects have lagged, save for in a few countries like the United States, Brazil, and Norway outside OPEC, and Saudi Arabia and the UAEUAE +1% inside the cartel. Companies to invest in more supply.

Fuel-switching is another reason this looks good for the oil. Natural gas prices remain high in Europe and Asia, pushing industrial users to switch from more expensive natural gas to petroleum products like fuel oil or diesel, increasing demand for crude oil.

It’s hard to envision a better setup for oil markets in 2023. It’s why oil market oil prices could hit $121 a barrel next year when China fully reopens. The impact on WTIS could also be significant. If China’s economy makes a full recovery in 2023, it will gradually increase crude imports throughout the year until it has added an average of 1 million barrels a day, this increased appetite could push up oil prices by about $US15 per barrel. The price of Brent could exceed $US100 again in the third quarter of this year, making the global battle against inflation still more difficult.

And it is why oil looks like an excellent place for investors in 2023 despite the economic headwinds expected to emerge around the world.

Agriculture commodities

Food price inflation has become a topic in every country, from Australia to the Democratic Republic of the Congo, and so there is a global concern and realisation of what is at stake. Government worries over higher food bills dominated much of 2022, but there are signs the pace of hikes is slowing. A United Nations index of food-commodity costs ended the year down slightly. But with high energy and labour costs, food will remain expensive for a while.

China’s relaxing of Covid restrictions will be watched by everyone. For foodstuffs from meat to vegetable oils, it should mean a jump in demand there as people regain confidence to dine out and travel. But the rampant spread of the virus has kept that suppressed for now.

This year has a good chance of being the first in several in the Pacific without the La Nina’s inflationary weather impact. Higher supplies from Russia to the European Union and Australia are weighing on grain prices. While we’re hopeful that there won’t be another massive spike in global food prices, however we remain worried that they have stabilised at high levels. While the Food and Agriculture Organization’s Food Price Index was down to 135.7 in November from 2022’s high in March of 159.7, it remains more than 40 points above 2019’s level, before the pandemic. Still, with droughts and floods affecting major crop growers like Argentina and Malaysia, weather remains the wild card.

Despite having eased off the highs reached early last year, food prices are likely to stay high, leading to shortages in the most vulnerable countries reliant on imported food.