Early business cycle phase begins: investment opportunities for 2H2023
As the world economy moves into the early phase of the business cycle following high inflation, 2H2023 presents unique investment opportunities shaped by monetary policies and macroeconomic trends.
In the initial half of 2023, central banks globally reached the climax of their interest rate hike cycles, a move necessitated by spiraling inflation. This decision dealt a significant blow to the financial sector, propelling several regional banks to the brink of bankruptcy while others collapsed entirely. Despite these economic tremors, growth in capital markets was fueled by rising demand for artificial intelligence technologies.
As the dust settles and the peak rates become more apparent, investors are strategically positioned to reassess their portfolios and identify lucrative investment opportunities for the second half of 2023. The OctaFX experts identified several trends that will drive the financial markets in 2H2023.
The Role of Inflation and Interest Rates
Understanding the economic cycle of developed and emerging markets is crucial to navigate the financial landscape. Central to this understanding are two key factors: inflation and interest rates.
The inflationary shockwave that rocked global markets in the early stages of 2021 started subsiding by the end of 2022, leading to a downward trend in global inflation. In tandem with this decline in inflation, central banks have halted further rate hikes, signaling a shift in global economies towards solid growth. This transition indicates the onset of the early cycle phase in the world economy.
Identifying Investment Opportunities
Given these global economic trends, certain asset types present promising investment opportunities for the second half of 2023.
Gold: As the U.S. Federal Reserve concludes its primary rate hike cycle, the expected weakening of the dollar might propel gold prices beyond the 2,000 USD per ounce mark.
Euro: The European Central Bank (ECB) is taking a more hawkish stance than the U.S., planning rate hikes of 0.25% in June and July due to the ongoing challenges the European economy faces. This move could potentially lead to a rise in EURUSD to 1.1800.
Japanese Yen: With Japan’s inflation remaining high, analysts predict a policy change regarding yield curve control by the Bank of Japan (BOJ) in their July meeting. As a result, the forecast for USDJPY stands at 150.
The Early Business Cycle and Energy Sector
Different stages of the business cycle favor various industries. The early business cycle, characterized by strong market growth, typically benefits financial institutions and consumer goods sectors while negatively impacting the energy sector.
Historically, the oil and gas industry underperforms during the early stages of a business cycle. This is due to low inflation when the economy is beginning to recover. Oil, a tangible asset, thrives towards the end of a business cycle when the purchasing power of money weakens, and inflation rises.
After surging from 20 USD to 120 USD in the wake of the inflationary shock, oil prices are now on a downward trend, signaling the exhaustion of investment opportunities in the industry for the foreseeable future.
“In the second half of 2023, investors should consider the expected decline in inflation and interest rates, which will likely weaken the dollar and strengthen gold. Due to varying monetary policies, such currencies as EUR, JPY, AUD, and NZD might experience significant growth, while oil and gas instruments may be less attractive during this period,” said Kar Yong Ang, the OctaFX financial market analyst.
Therefore, investors need to understand the shifting monetary and economic landscape to optimize their investment strategies in 2H2023.