It’s been another mixed period for markets. As recent events have made clear, this remains a challenging investment environment that needs to be navigated with great care.
Growth assets have wavered since our last update, due to the stress in the US regional banking sector and with the Swiss government brokered takeover of Credit Suisse by UBS. With authorities underpinning the US banking system with a little help from the largest banks, attention has turned to the impact on central bank policy.
Economic outlook
Market expectations are now for the US Fed to either increase interest rates once more or to pause and see the impact on the economy. Higher interest rates mean credit is more expensive for borrowers, while tighter lending standards both increase the cost and reduce the availability of lending. Similar trends are seen in Europe and the UK, meaning that households and corporates now face more difficult choices about the composition of their spending, saving and investment.
Weak economic data points to a deceleration in growth. This is linked to highly interest rate sensitive sectors of the economy, such as housing, or directly to the tightness of monetary policy. The breadth of these financial indicators is the main reason we are keeping a cautious stance in portfolios, being underweight growth assets.
However, the potential saving grace is that many households and corporates locked in borrowing costs while interest rates were low. This somewhat blunts the impact of higher interest rates as not all borrowers are affected at the same time. Whilst a gentle economic slowdown is still a possibility, there is a risk that central banks have to keep higher interest rates for a prolonged period. In this second outcome, we are likely to see weaker growth and rising unemployment.
How we’re positioned
We are alert to the risk of pressure on corporate profits in the months ahead. But we are also mindful of the resilience of large companies, especially those in the US and those exposed to our favoured structural growth themes, notably environmental and technology companies.
The increasing breadth of government policy support for climate related investment continues to grow. The EU and UK have long supported companies in this area and now with the Inflation Reduction Act in the US catalysing trillions of dollars’ worth of investment, we think there is potential for substantial earnings growth in this theme in 2024 and beyond.
Meanwhile, the release of ChatGPT is being likened by many as the latest ‘iPhone moment’. We’ve seen a deluge of new AI apps and tools in the last few months. When actively used by workers, AI has the potential to boost productivity and ultimately boost economic growth.
Overall, we are still focused on portfolio resilience with the core of portfolios focused on high quality companies that can weather the economic storm, should it come to pass, while slightly increasing our exposure to favoured long-term themes.
