Chapters
Market observations
Global growth signals are mixed
Iain Cunningham – Head of Multi-Asset Growth
US hopes for a soft landing
In the US, monetary policy is tight, and a broad-based moderation of economic activity continues. As a result, the US Federal Reserve (Fed) has begun to cut interest rates and signalled limited tolerance for further deterioration in the US labour market. Financial markets have remained volatile as investors weigh the prospect of a more pronounced slowdown and the Fed being ‘behind the curve’ against the prospect of a soft landing coupled with the stimulus of rate cuts and easing financial conditions. Fiscal policy in the US has remained loose and continues to support economic growth, and the election in November will likely increase uncertainty and therefore financial market volatility. In our view, the risk of a more pronounced slowdown is elevated, but the prospect of monetary policy easing, ongoing fiscal support and a still relatively robust growth picture leads us to view a soft landing as the central scenario for the US at present.
Eurozone growth likely to disappoint
In Europe, we believe policy is tight and the lags have been shorter than in the US due to less pandemic stimulus, higher levels of floating rate debt and less fiscal support. Growth indicators are weak, below trend, and close to recession in some countries, while shorter-term measures of inflation are now in line with the European Central Bank’s (ECB) target. We expect eurozone growth to remain weak for the time being and for inflation to continue to moderate as energy price pressures abate. We believe that the ECB’s easing cycle will ultimately prove to be more pronounced than the Fed’s given structural headwinds in the eurozone against tailwinds in the US.
China recovery hangs in the balance
In China, policy appears loose albeit without material easing taking place. Easing measures are however becoming more forceful, with a broad swathe of new measures announced over the past month, causing a material rally in Chinese and Hong Kong equity markets. We expect policymakers to do what it takes to ensure that a sustained recovery takes hold. Growth metrics remain mixed, and the recovery will remain bumpy. Inflation remains weak but base effects should begin to provide more support on a forward-looking basis. We continue to believe that the Chinese economy will experience a more benign outcome than the bearish consensus suggests.
Looking ahead
Our central investment roadmap, as discussed above, leaves us somewhat more constructive on the prospect for risk assets, particularly in Asia and the US. In fixed income, a healthy exposure to defensive government bonds remains, given the elevated risk of recession. This also provides dry powder to put to work should we see episodes of volatility in the coming six months. In currency, we maintain a preference for the US dollar versus European and Asian currencies, as a diversifying portfolio position, given positive carry dynamics and our expectation that easing in these regions will be more pronounced than in the US.
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Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Commodity related investment: Commodity prices can be extremely volatile and significant losses may be made. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
