Monthly Investment Outlook – September 2023

Markets and investor sentiment remains torn between optimism over peaking inflation with expectations of a ‘soft landing’ for the economy, and fears of a ‘higher for longer’ rate environment. As such we note that since the end of the new-year relief rally in January, most equity markets are flat or mildly in the red and furthermore government bond yields are now higher than they were a year ago. Commodity markets (with the exception of crude oil) are also in negative territory for the year. This all adds up to another difficult year for multi-asset investors and active money managers alike, especially if they are not substantially exposed to the stocks benefiting from the AI boom.

Those waiting for a Fed pivot towards lower rates have been frustrated by the resilience of the US economy, and even if most of the heavy lifting by central banks in their battle against inflation has now been completed there is a growing realisation that we will not be returning to an era of cheap money that has buoyed risk assets for so long in recent years. Adding to this uncertainty is the worry that the full effects of tighter monetary policy and the resulting higher cost of credit has yet to truly feed through into the real economy, at a time when household’s post-pandemic savings are starting to diminish. Nevertheless, the slowdown expected by the majority of commentators for 2023 has not yet transpired, and while stocks have flat lined there has not been a major correction.

Perhaps a recession will simply come later in 2024 once the higher interest rates and rising wages start to bite into corporate profitability, but we are open to the likelihood that in the meantime equities can make money for investors due to the shifting regional and style trends that can be captured by an active approach. We are further encouraged that the declining economic picture in China seems to have been stymied for now by a fresh round of stimulus, as fears over the region had been a chief reason for the summer weakness in equity markets. We counsel a fully invested strategy now that yields on short-dated bonds are meaningful, albeit with a cautious outlook.

“ (…) we note that since the end of the new-year relief rally in January, most equity markets are flat or mildly in the red and furthermore government bond yields are now higher than they were a year ago. ”

JONATHAN UNWIN – MONTHLY OUTLOOK

Central Bank Rates

Country	Current rate	3 Months	6 Months	9 Months	Peak
US	5.33	5.44 ↑	5.38 ↑	5.17 ↑	5.44 (November)
EU	3.9	3.97 ↑	3.92 ↑	3.77 ↑	3.97 (December)
UK	5.19	5.54 ↓	5.54 ↓	5.45 ↓	5.55 (February)
JAPAN	-0.07	0.00 ↑	0.08 ↑	0.13	0.18 (July)

Our sub-asset class views

		–		=		+
EQUITIES				GGGG				Sentiment continues to be pulled by fears of higher rates for longer and pushed by expectations of a soft economic landing. We expect earnings to fall, but there are opportunities for active investors.
US				GGGG				Most companies are treading water outside of the AI boom, as the US economy remains resilient but moderate.
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				ECB are data dependent and recent PMI’s indicated weakness, which will drag on cyclicals. There are strong, resilient businesses to buy.
Switzerland				GEGE	GEGE			Quality, defensive nature of the market continues to see Swiss stocks in demand, though valuations relatively rich now. We like CHF.
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				Headline yields are now above fair value, and while there may be further inflation shocks, bonds can once again be useful to offset equity risk.
Sovereign Bonds				GGGG				We prefer Treasuries to Bunds as the Fed appears nearer to cuts than the BOE or ECB. Economic slowdown should provide demand. Avoid Japanese.
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			Peaking real rates should help the gold price, and trades in its own way to offer diversification.
Hedge Funds				GEGE	GEGE	A		We aim to create a blend of alternative strategies that offer different return profiles and risk premia to bonds and stocks.
Oil/Commods				GEGE	GEGE			2022’s spike has receded but shifting geopolitics and green policies will offer structural upside over the longer term.

		–		=		+
CURRENCIES								Despite summer USD strengh, the FED is near the end of its rate cycle. Much will depend on inflation in Europe, and how quickly it catches up with the US.
U.S. Dollar (DXY)			RRRR	RRRR				The dollar had a good summer due to the resilience of the US economy, and perhaps, premature expectations of rate loosening. Both factors look set to unwind.
Sterling (GBP)				GGGG				Recent weaker inflation print has muddied the BOE outlook, but GBP unlikely to see immediate further weakening.
Euro (EUR)				GGGG				ECB direction is inflation and data dependent, so immediate direction is unclear. Slowing growth as indicated by PMI’s may drag.
Japanese Yen (JPY)				GEGE	GEGE	GEGEAAA		In the long term, 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 amid steady inflation.
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.