Monthly Investment Outlook – July 2023

Author: Jonathan Unwin, Asset Management & Advisory.

Despite the collapse of another US bank (First Republic) and increasing consensus expectations of a recession, equity markets have remained fairly resilient, albeit most of the gains in both US and European stocks being accounted for by a handful of companies. In Europe it has been the luxury goods giants that have dragged markets up, as they enjoy a mini-boom due to the reopening of the Chinese economy in early 2023, while in America it is a familiar group of mega-tech stocks that have bounced following last year’s inflation-driven rout.

Earnings season has allowed stock-market operators to focus on company-specific fundamentals while monetary-policy expectations have been broadly stable since mid- April, leading to fairly direction-less markets over the past month. This could soon end, however, as the anticipated ‘final’ Fed hike happens, and the markets are forced to face the reality of a potentially extended period of rates above 5%, and the fact that while ostensibly corporate earnings have been reasonable in terms of analysts expectations (low expectations) it is in fact another quarter of lower results in real terms, i.e. an earnings recession.

Inflation remains stubborn on both sides of the Atlantic and is even showing itself in Japan, and the bond markets are more than aware of this, (even if equities aren’t), as following the brief support Treasuries received during the banking mini-crisis the yield curve now looks very similar to how it did at the start of the year.

Elevated front-end yields suggest markets believe there will be rate cuts sooner than the Federal Reserve is indicating and this contradiction usually involves some turmoil as the two have to reconcile at some point. Of course, it is possible that the US may avoid a recession and some of the data has been improving, however, we feel that there are enough indicators suggesting otherwise that caution across all asset classes is sensible for now.

“ Earnings season has allowed stock-market operators to focus on company-specific fundamentals while monetary-policy expectations have been broadly stable since mid- April, leading to fairly direction-less markets over the past month. ”



Stocks have held on to early gains despite the banking sector turmoil, but they appear increasingly detached from economic reality.


Selective short duration investment grade bonds look attractive and we are wary of taking too much credit risk at this point.


Gold has proven its worth as a diversifier to an investment portfolio through the recent volatility.

Central Bank Rates

CountryCurrent rate3 Months6 Months9 MonthsPeak
US5.085.09 ↑4.77 ↓4.33 ↑5.14
EU3.153.56 ↑3.67 ↑3.54 ↑3.67
UK4.434.76 ↑4.85 ↓4.73 ↑4.86
JAPAN-0.03-0.02 ↓0.01 ↓0.03 ↓0.03

Our sub-asset class views

EQUITIESRRRRRRRRRRDespite the banking crisis and the deteriorating fundamentals most equity markets have enjoyed a strong first quarter. An earnings recession amid stickier inflation warrants caution.
USRRRRRRRRRREquities are being directed by rate expectations at the moment, and while the US economy looks better placed than elsewhere, its’ growth bias makes it vulnerable to earnings revisions.
UKGGGGGBritish stocks are still very cheap compared with other markets, and the energy/mining component of the 100 is attractive. Bleak political/economic backdrop.
EurozoneGGGGGRegion is grappling with high inflation and energy prices but this has been offset by the China reopening and a mild winter. Energy and financial stocks look the best value.
SwitzerlandGGGGGQuality, defensive nature of the market continues to see Swiss stocks in demand, though valuations relatively rich now.
EMGGGGGWe retain an allocation to emerging Asia for the long-term growth potential, with China’s reopening finally here. Most EM regions do not justify their risk premiums.
JapanGEGEGGEGEGAttractive valuation for a developed market, with a lower yen supporting its export sector. Economy currently slowly ‘reopening’ from Covid.
FIXED INCOMERRRRRRRRRRYields are far more attractive than a year ago, but it is unclear whether a period of structurally higher rates and inflation is yet priced in. The far end of the curve is vulnerable to steepening.
Sovereign BondsGGGGGUS yield curve is inverted and rates remain under threat while inflation remains elevated. Recession may see some support, but not until FED expectations peak.
Corporate I.Grade BondsGGGGGBuyers may soon come back with 5% yields for corporates looking attractive against a recessionary backdrop. US looks preferable to Europe.
High Yield BondsGGGGGDefault rates are subdued, but may rise as financing costs increase. Yields look attractive, but highly selective approach needed.
E.M. BondsGGGGGWe are generally cautious on emerging markets given looming recession fears, but our short duration approach achieves yield at acceptable risk.
ALTERNATIVESGEGEGGEGEGWe like holdings that are genuinely uncorrelated to the main asset classes.
Precious MetalsGEGEGGEGEGGold is well supported as rate expectations peak. Remains the most compelling long-term hedge against inflation and elevated geopolitical risk.
Hedge FundsGEGEGGEGEGGEGEGGenuine alternative funds that behave in a different manner to traditional assets are a vital source of wealth preservation and diversification.
Oil/CommodsGEGEGGEGEG2022’s spike has receded but shifting geopolitics and green policies will offer structural upside over the longer term.
CURRENCIESDollar demand returned amid the March banking crisis, but DXY looks set to slide as the Fed nears the end of it hiking cycle and other regions’ policy makers catch up.
U.S. Dollar (DXY)GGGGGThe 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)GGGGGA period of political calm and a hawkish BOE are supporting the pound, with recent data better than feared. A potential higher tax regime may stifle competitiveness.
Euro (EUR)GGGGGHas 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)GEGEGGEGEGJPY has potential to breakout when BOJ loosen curve control. Domestic economy is strengthening, but will Kuroda loosen before his successor takes over.
Swiss Franc (CHF)GGGGGCHF remains relatively steady despite CS debacle. Chances of an SNB hike unlikely now though.
EMGEGEGGEGEGCNY will benefit from economic pick-up in China, while other EM’s will enjoy carry from and long term USD weakness.