Since our last update, growth assets (company shares and other assets that perform similarly) have delivered mixed results. While the hype around artificial intelligence has seen a narrow segment of the market perform very strongly, there are others that have been lacklustre.
Meanwhile, the long-expected economic slowdown has so far not only been shallower than expected but has also had less of an impact on the performance of growth assets than expected. Although inflation is still high, it has been falling around the world and in China it is now negative.
Market outlook
Renewed optimism stems from several factors, notably the resilience of consumer spending and falling inflation. But this is coupled with the view that greater government spending will support activity, especially in the hard-hit manufacturing sectors in the US & Europe, as part of an effort to repatriate industrial production. Meanwhile, the size of the so called ‘non-bank financial sector’ (such as pension funds, insurance companies and investment funds) is now comparable with the traditional banking sector, which potentially blunts the expected impact of higher interest rates and tighter bank lending standards.
However, concerns still linger. First, there’s a risk that prices (inflation) could change a lot more than they used to, especially for food and energy. This might lead to people asking for higher wages, and as a result, central banks might keep interest rates higher for a longer time to counteract these wage increases. Secondly, when banks are more careful about who they lend to, it has historically led to a weaker economy and more uncertainty.
Additionally, consumer sentiment seems good when asked in surveys, but actual spending data is not as positive. The positive survey responses might be because people feel better about price rises easing, rather than them being better off. This inconsistency is highlighted by the increasing number of companies going out of business in the US. Many of these companies cater to non-essential spending and their struggles might show that people are being more careful with their money.
How we’re positioned
This makes for an uncertain and complex investment environment in the short term. As such, while overall exposure to growth assets in our portfolios has increased back towards long-term strategic weights.
As discussed previously; we have focused the core of portfolios on higher quality companies with strong balance sheets. But we are also backing our high conviction, longer term thematic investments where we continue to see strong growth potential and where we believe corporate earnings have the best chance to surprise on the upside. These include various technology themes (such as artificial intelligence, semiconductors, and digitalisation), health care and environmental equities.
Where appropriate, we are also adding investments that have the potential to benefit from a more volatile investment environment, such as absolute return funds which aim to generate positive returns over time, regardless of the general direction of the market.
In times of uncertainty, it’s important to maintain a long-term perspective. While short-term savings rates on cash look attractive, the long-term return potential from a diversified portfolio is more attractive still.
Please remember, this article is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.
