The global growth backdrop looks encouraging even after a string of aggressive rate increases last year. The fact that the growth engine is driven by the rest of the world, and not just the U.S., is a positive sign. Anecdotal data from China point towards strong performance after reopening, while European consumers are benefiting from lower energy prices.


The availability of jobs and rise in salaries are underpinning consumer demand. This is a far cry from the sentiment witnessed last year when talk of recession gathered currency. In the U.S., unemployment rate has fallen to 3.4%, the lowest level in more than half a century. The labour market in the U.K. also has a similar story to tell, with pay excluding bonus rising 6.7% in the last three months of 2022.


In March 2022, when the U.S. began raising rates, core inflation was at 6%, well above target, and the U.S. Federal Reserve has hiked its policy rate by 450 basis points since then. Although goods and energy prices have come down, core inflation is still somewhat elevated and sticky. This makes it difficult for central banks to step back and get comfortable with inflation. Purchasing managers’ indices as well as consumer confidence data also show a recovery. It looks like we are headed towards a soft landing and a pause in rate increases is a possibility.


Turning to ESG, the corporate bond market has evolved over the past two years. While green bonds and sustainability-linked bonds commanded a premium earlier, now investors are a lot more discerning. They also question whether the bar set for achieving targets are too low or unambitious. In terms of sovereigns, engagement is a lot more difficult. As a starting point, we screen for human rights and decarbonization. 

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