4th September 2023
Here in the UK we have had the welcome news that inflation is falling, though still remains very high. The key issue facing the UK economy is house prices. The housing market is a key component of wealth in the UK, with many tying their major source of net worth to their houses. Falling prices as a result of rate rises from the Bank of England is likely to put sustained pressure on the housing market, with many now being priced out of buying. Additionally, the majority of current fixed rate mortgages are set for renewal over the next 12-18 months. This will mean many households will be forced to pay in some cases 50% more than they are already – a situation many simply can’t afford. Expect this to hit discretionary spending hard as households adjust.
In the US, the core rate of inflation actually climbed slightly, taking some markets by surprise. The ongoing stickiness of core inflation may well mean that the Fed elects to keep interest rates at higher levels than markets expect – which is what the Fed have been saying for some time. Equity market have been pricing in a goldilocks outcome: inflation back to target, ongoing economic expansion, and continuation of low unemployment. Such an outcome was always unlikely.
China’s exports fell for a third straight month in July because of weaker global demand, while imports plunged 12.4%. The data points to a very sluggish economic recovery. Investors will be looking for more announcements of government stimulus, which they will hope is a government priority for shoring up economic growth, though it is the CPI and PPI data which is important for confirming the deflationary trend. China’s economic growth/recovery will be a hot topic in the coming months.
2023 has continued the recovery in risk assets following what appears to be the peak of inflationary pressure in the US and Europe, having come under pressure last year from higher inflation rates and recession fears whilst central banks began hiking interest rates. Value equities continue to offer more protection against downside threats compared with their growth peers, as they tend to benefit most from strong recoveries after recession and trade on lower earnings multiples. We are taking a more cautious approach to portfolio positioning for a possible recession.
We still like selective growth stocks where there remains true innovation and potential for change, especially recent trends in consumer behaviour that were accelerated by the pandemic but prefer value equities on the whole. We also continue to hold our overall equity weighting at neutral. Fixed income has started looking more attractive following last year’s bear market, with yields now at levels not seen in well overa decade. Bonds also remain an important diversifier in our portfolios. With inflation having seemingly peaked, we believe interest rates could begin to head lower as fears of a global recession pick up. Low duration bonds look the more appealing investment still given the level of inversion in the yield curve, along with selective investment grade credit which was hit hard during 2022.
Duration will become appealing again as market participants shift their primary concern away from inflation and towards growth fears, however we are cautious in our positioning here. We also hold an allocation to cash to offsetsome of this fixed income risk and dampen portfolio volatility. We have also been adding ‘alternative’ assets to the portfolios, which offer low-to-negative correlations to traditional asset classes (stocks and bonds) and give the potentialto protect during times of significant market volatility, such as we are seeing at present.
The UK market is very value-tilted and despite this year’s positive relative performance is still highly attractive on a valuation-basis. The UK economy has also recovered well from the pandemic, though economic growth is faltering. The main driver of UK equity outperformance will be relative valuations.
There is good value to be found in European equities and the region is attractive given historic valuation differentials to the US, and financial companies stand to benefit with interest rates on the rise.
The US represents poorer value relative to the rest of the world due to the highproportion of tech companies that still command a multiple far in excess of the broader market, however it also has the best long-term earnings growth and some of the most outstanding quality companies, as well as the most innovative. In times of global stress, the US also tends to act as a safe haven investment, which props up markets. Overall, we are cautious on the US and soare positioned underweight in portfolios. We do believe the US will remain an attractive investment option in the long-term, but with some obvious headwinds making us more cautious for now.
We believe Japan to be an extremely poor environment for equity performance. The Japanese economy is predicted to grow at the slowest pace of all regions, in addition with a declining and ageing population, the prospect of future economic expansion looks unlikely. Thus, we expect poor relative equity performance from Japan. In the short-term, attractive valuations in the region may boost markets, but this will likely be short-lived.
Asia Pacific & Emerging Markets
Asia Pacific and Emerging Markets are predicted to see exceptionally strong GDP growth over the several years and with China’s reopening look set to outperform the broader global equity market. Thus, we are comfortable maintaining an overweight position. The more recent remarks from the Chinese government have been positive but must be taken with a pinch of salt. We currently like frontier markets as a more attractive investment option within the emerging markets universe. Typically, market move in cycles and EM vs US performance is no different. We have been in an extended period of US equity outperformance, and we now expect this trend to change in favour of EM stocks. The continued upwards trend in US equities is the narrowest in history, with just a select few large tech companies carrying the entire index higher. We do not expect this to continue in perpetuity.
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 4th September 2023, and are subject to change.
The content of this publication is for information purposes and should not be treated as a forecast, research, or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.
Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.