MONTHLY UPDATE: Transition time
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.