How our worldview is changing

Investment focus

The West is slowing with bouts of financial instability, and banking-sector stresses leading to tighter lending conditions, while the East is accelerating. Market volatility resurfaces every now and then and a shallow recession is still likely in the US. China and Japan have more room to continue to rebound. Contrary to our initial expectations, the Eurozone and UK appear to have avoided an outright recession due to receding energy risks. This limits any market expectation for interest rate cuts in developed markets, which we think are more likely in 2024.

The global economy

A continuation of 2023’s three major shifts: peaks, pauses and pickups

At the beginning of the 2023 we were expecting three major shifts, which have come to fruition to some extent, and we expect to continue for the rest of the year:

Inflation peaks

Inflation begins to ease in the US and, with a lag, in the Eurozone and the UK, where it’s still elevated but will likely moderate.

Central banks pause

The US Federal Reserve’s latest rate increase was, in our opinion, likely their last of the year. We believe the European Central Bank and the Bank of England will follow suit but later in the year as they continue to battle elevated inflation. We don’t expect rate cuts in 2023.

China’s economy picks up

In the absence of inflationary pressures, China has room to continue to implement stimulative policy measures to support its economy.

Central banks pause monetary policy tightening as inflation slows but stays above target.

Source: In-house research, Refinitiv; note: dotted line = own forecast.

China’s economic #pick-up looks set to continue

Source: In-house research, Refinitiv; note: dotted line = own forecast.

BACK TO THE TOP

Markets

High-quality bonds and defensive equities are attractive in a volatile late-cycle environment

As interest rates peak, growth slows and inflation eases, high-quality bond markets look attractive as history has shown they tend to outperform equities in these conditions. Even now, the risk-reward for equities is poor relative to high-quality bonds – a 6-month Treasury bill is currently yielding more than the S&P 500.

The late-cycle volatility we expect limits upsides in equity performance, and we therefore do not believe it is time to re-risk portfolios yet. Thus, low-volatility equities are more attractive as they mitigate downside risks while partially capturing the upside. In addition, as inflation is not an issue in Asia, and China’s re-opening continues, Asia-Pacific equities including Japan are also attractively valued.

High-quality bonds are attractive as interest rates peak, the pace of economic growth slows and inflation falls back.

History has shown they tend to outperform equities in these conditions.

We believe equity markets to the Far East are more attractively valued to the relatively more expensive US market.

Asia-Pacific equities including Japan also provide an exposure to post Covid re-opening trends.

We believe European and UK investment grade bonds will come under pressure as the European Central Bank and the Bank of England continue to raise interest rates a while longer.

US investment grade bonds, on the other hand, look comparatively attractive as the Fed is likely to pause its tightening cycle.

Eurozone equities look fairly valued.

However, the economic outlook calls for caution and we therefore believe more defensive minimum volatility equities – which blend the Eurozone with defensive markets such as the UK and Switzerland, and give a higher weight to defensive sectors such as health care and consumer staples – could outperform the market if we see a spike in volatility or a downturn.

BACK TO THE TOP

Information correct as at 25 May 2023

This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.

This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.

The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.

The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.

This is a non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used (https://brownshipley.com/en-gb/privacy-and-cookie-policy).

A new market cycle

High-quality bonds are attractive as interest rates peak, the pace of economic growth slows and inflation falls back.

We believe equity markets to the Far East are more attractively valued to the relatively more expensive US market.

We believe European and UK investment grade bonds will come under pressure as the European Central Bank and the Bank of England continue to raise interest rates a while longer.

Eurozone equities look fairly valued.