Investing & Performance | 08 February 2023
MONTHLY UPDATE: Transition time
Markets breathe sigh of relief as inflation pressures ease
WHAT’S HAPPENING IN FINANCIAL MARKETS?
The year has started with a more optimistic market mood than we saw throughout most of 2022, largely thanks to inflation being seen as less of a risk.
The mild European winter lowered projections for future energy prices, which was a positive development for both bonds and equities across the continent. And China’s decision to re-open its economy also contributed to the more buoyant mood.
Coutts’ Head of Investment Strategy Sven Balzer said easing inflationary pressures were the main story for January, partly because other issues have not yet come through.
“Easing inflation pushed bond yields lower and stock prices higher on hopes central banks could start to cut interest rates later this year,” he said. “Markets looked at this positively as higher interest rates, and their slowing effect on economic growth and corporate earnings, still need some time to become visible.”
However, data shows that last year’s central bank interest rate rises are beginning to have an impact. The US housing market has weakened and consumers are finding it harder to borrow, which is weighing on retail sales. Forward-looking economic indicators suggest the pace of US growth will continue to slow this year.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
The global economy and financial markets are in a transition phase. On the one side, inflation pressures seem to have eased, but it’s too early for central banks to start cutting interest rates. Meanwhile, China is opening up while the US economy continues to slow down and move towards a recession.
With this uncertain landscape front of mind, our portfolios remain cautiously positioned.
We shifted our positions more towards bonds in the latter part of last year as we think lower inflation risks are positive for the asset class. Our overall exposure to stocks remains unchanged from December. This month’s leading data has again confirmed the risks of a slowing US economy, and the corporate earnings picture has been mixed, as we expected.
Sven said, “There is a contrast developing between cautious macro data and upbeat market trends this month. We’ll look at the data for evidence showing how this contrast will resolve in the coming months and adjust portfolios prudently.”
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.
THIS MONTH'S SPOTLIGHT
THE IMPACT OF STRIKES
The UK lost 467,000 working days to strike action in November last year, bringing the total number of strike days in 2022 to a 30-year high, according to the Office for National Statistics. With rail staff, NHS workers, postal workers and employees in many other industries taking action over pay and working conditions, there’s been significant disruption.
It’s easy to see the impact on some businesses. For example, Royal Mail says the recent strikes have cost the company £200 million. But Sven said working out the implications for the wider economy was harder.
“In some instances, people’s usual spending habits won’t stop, they will just be displaced,” he said. “For instance, office workers who aren’t able to travel into the city because the trains aren’t running will work from home and buy their lunch and coffees somewhere else.
“On the other hand, strikes could accentuate a structural headwind for the UK economy, which is seeing a shortfall of workers. But overall, these effects are hard to quantify, and we would not see them as a key driver of the economy in 2023.”
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Coutts’ clients can find out more about what’s happening in the investment markets and how it impacts their investments by speaking to their private banker.
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.