Chapters
Market observations
Watch out for the lag
Iain Cunningham – Head of Multi-Asset Growth, Alex Holroyd-Jones – Portfolio Manager, Rebecca Phillips – Assistant Portfolio Manager
Our market outlook and positioning remain at the cautious end of the spectrum. There is increasing evidence that the significant policy tightening witnessed over the past 18 months is beginning to exert an impact, primarily within the euro zone, while also influencing key indicators that we consider to be leading in the United States.
In the US, we believe policy is tight in aggregate with rates having likely peaked, quantitative tightening remaining ongoing, and the positive fiscal impulse that has been in place for much of last year now fading. This is evidenced by contracting monetary aggregates and credit impulses, increasing balance in the labour market, and ongoing disinflation. We expect growth to continue to moderate into 2024 and believe that there is a higher probability of a recession than is currently being priced into financial markets. We believe that US inflation will continue to decelerate, with three-month annualised statistics already being close to the US Federal Reserve’s (Fed) 2% target.
US credit impulse
US Core CPI
Source: Ninety One, Bloomberg, December 2023. The date range was selected to evidence current data against previous recessionary events, hence the range extends to pre-2008.
In Europe, we believe policy is tight and the lags are shorter than in the US due to less pandemic stimulus, higher levels of floating rate debt and less fiscal support. Growth indicators have been deteriorating rapidly and there is still a considerable amount of prior tightening to feed through. We believe Europe is in the process of entering a recession that is likely to deepen rather than recover from here. Inflation is falling quickly, and three-month annualised core inflation statistics are currently below the ECB’s target. We see an increasing risk of a deflationary period in the euro zone and believe that it’s only a matter of time before the ECB eases policy.
Euro credit impulse
Euro Core CPI
Source: Ninety One, Bloomberg, December 2023. The date range was selected to evidence current data against previous recessionary events, hence the range extends to pre-2008.
In China, policy appears loose albeit without material easing taking place. Easing measures are however becoming progressively more forceful. We expect policymakers to continue to ease policy through various measures as they aim to ensure that sustained recovery takes hold. Growth metrics are mixed, and the recovery is bumpy. We expect it to remain so without more forceful easing measures. Inflation is 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.
China credit impulse
China PMIs
Source: Ninety One, Bloomberg, December 2023.
Our central investment roadmap, as discussed above, leaves us relatively cautious on DM risk assets and more constructive on defensive duration – particularly in Europe. In Asia, we maintain a somewhat more constructive view on equities. In currency we maintain a preference for reserve currencies – particularly the Japanese yen vs. the euro, where we see scope for policy tightening from the BOJ at a time when the ECB is likely to be moving towards easing policy.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
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.
