Monthly Investment Outlook – August 2023

With the Federal Reserve (and indeed the markets) now expecting a ‘soft landing’, i.e. a scenario where inflation moderates without upending the wider economy, investors may be forgiven for feeling far more relaxed about the prospects for their assets than at any point over the past 18 months.

Though price indices remain higher and stickier than expected there is little doubt that inflation is now moving in the right direction and appears to have peaked in all developed economies, and (forward-looking) equities in particular are reflecting this. In under 20 months, the pandemic’s bear market that rocked the stock market is nearly wiped out with most of 2022’s losses recovered. Volatility in stocks has once again dropped back to extreme lows, as the years’ earlier banking crisis and US debt ceiling imbroglio now seem firmly in the rear-view mirror, with financial markets taking a leap of faith, discounting a sharp bounce in economic activity, for which there is little evidence.

Markets are even pricing in a rate cut in the US by the end of the year, which looks especially optimistic, and would require a sustained period of strong data that does not seem forthcoming at this point. Employment, globally, remains robust and while this is the case any recession will be largely technical rather than acutely felt by the consumer, although paradoxically a strong jobs market may prolong higher inflation. Equity valuations have crept back up to expensive levels, led by the continuing mania for AI stocks, but these valuations are by no means even and away from the leader-board many cheap opportunities exist for the patient investor.

While we are not convinced that the equity bear-market has concluded, we accept that there does not seem to be cause for an imminent crash, and there ample pockets of value across the asset-class spectrum that allow us to be near fully invested.

“ Volatility in stocks has once again dropped back to extreme lows, as the years’ earlier banking crisis and US debt ceiling imbroglio now seem firmly in the rear-view mirror, with financial markets taking a leap of faith, discounting a sharp bounce in economic activity, for which there is little evidence. ”

JONATHAN UNWIN – MONTHLY OUTLOOK

Central Bank Rates

Country	Current rate	3 Months	6 Months	9 Months	Peak
US	5.33	5.44 ↑	5.35 ↑	5.08 ↑	5.44 (November)
EU	3.58	3.80 ↑	3.79 ↑	3.75 ↑	3.70 (October)
UK	4.93	5.71 ↑	5.83 ↑	5.83 ↑	5.83 (March)
JAPAN	-0.07	-0.05 ↓	-0.04 ↓		-0.04 (December)

Our sub-asset class views

		–		=		+
EQUITIES				GGGG				The gap between earnings expectations and fundamental economic health has widened, suggesting stocks have got ahead of themselves. Top line valuations are stretched, but there is plenty of value to be found.
US			RRRR	RRRR				The US tech sector and hype surrounding the potential of AI has dragged the market higher, with most index constituents treading water as recession looms.
UK				GGGG				British stocks are still very cheap and GBP appreciation attractive for EUR, USD investors. Growth revised up, but tepid. Wage inflation a problem.
Eurozone				GGGG				Reasonable valuations and solid earnings outlook are tempered by high inflation and mediocre growth outlook. Germany in recession, but region could benefit from China stimulus.
Switzerland				GEGE	GEGE			Quality, defensive nature of the market continues to see Swiss stocks in demand, though valuations relatively rich now.
EM				GGG				China looks to receive more stimulus as reopening fizzles out, but this may not transpire into equity gains. Other Asian economies look set to benefit from Western ‘friendshoring’.
Japan				GEGE	GEGE			Attractive valuation for a developed market, with a lower yen supporting its export sector. Economy currently humming. Appreciating JPY should offset QT for foreign investors.
FIXED INCOME				GGGG				The cloudy inflation outlook precludes us from being over-optimistic towards bonds, but with yields more normalised and economic slowdown looming, an upgrade to a neutral weighting is justified.
Sovereign Bonds				GGGG				We prefer Treasuries to Bunds and Gilts as the Fed appears nearer to cuts than the BOE or ECB. Economic slowdown should provide demand.
Corporate I.Grade Bonds				GEGE	GEGE			Short duration high quality IG yielding 5/6% is appealing as the core of a bond portfolio. Duration’s time will come, but not yet.
High Yield Bonds				GGGG				Default rates are subdued, but may rise as financing costs increase. Yields look attractive, but highly selective approach needed.
E.M. Bonds				GGGG				We are generally cautious on emerging markets given looming recession fears, but our short duration approach achieves yield at acceptable risk.
ALTERNATIVES				GEGE	GEGE			We like holdings that are genuinely uncorrelated to the main asset classes. AAAAAAAAAAAA
Precious Metals				GEGE	GEGE			Gold is well supported as rate expectations peak. Remains the most compelling long-term hedge against inflation and elevated geopolitical risk.
Hedge Funds				GEGE	GEGE	GEGEAAA		Genuine alternative funds that behave in a different manner to traditional assets are a vital source of wealth preservation and diversification.
Oil/Commods				GEGE	GEGE			2022’s spike has receded but shifting geopolitics and green policies will offer structural upside over the longer term.

		–		=		+
CURRENCIES								Currencies are largely following the trajectories of their respective central banks, which points to a weaker Dollar, all else being equal.
U.S. Dollar (DXY)			RRRR	RRRR				The dollar is only likely to retreat further if lower inflation trend is confirmed and FED becomes more dovish. Likely to be underpinned by relative resilience of US economy v Europe.
Sterling (GBP)				GEGE	GEGE			A period of political calm and a hawkish BOE are supporting the pound, and economic data has once again been revised modestly upwards.
Euro (EUR)				GGGG				Has rallied on ECB hike, China and sticky inflation. Economy looks vulnerable to consumer squeeze and ECB will be wary of hiking too hard in face of recession.
Japanese Yen (JPY)				GEGE	GEGE	GEGEAAA		JPY has potential to significantly breakout when and if BOJ loosen curve control. For now loose monetary policy remains.
Swiss Franc (CHF)				GGGG				CHF looks well set, with the prospect of incremental higher rates and the UBS takeover of CS now in the rarview mirror.
EM				GEGE	GEGE			China stimulus and the first rate cut in some years may hold CNY back. Other EMFX’s may do well as the Dollar weakens.