Investing & Performance | 09 January 2023

MONTHLY UPDATE: Inflation appears to have peaked

The focus is shifting to concerns about the economic slowdown



Global inflation appears to have peaked, with the latest figures revealing a slowdown across most major regions. However, the annual pace of price rises remains at multi-decade highs of 7.1% in the US, 10% in the eurozone and 10.7% in the UK, according to December’s monthly print. Central banks increased interest rates further in December and have reasserted that the fight against inflation isn’t over.

Lilian Chovin, Head of Asset Allocation at Coutts, said: “Following the November relief rally, markets have shifted their attention to the economic slowdown. Europe and the UK have probably already fallen into recession and we’re just waiting for confirmation from the official statistics.”

He added: “Meanwhile, leading indicators suggest the US economy could begin to contract at some point over the next few months.”

China had begun to dismantle its zero-Covid policy towards the end of last year. The restrictive measures to contain the virus had crippled the economy, leading to a rare outbreak of public protests. However, the virus has now spread ferociously in the wake of restrictions being lifted, and reports say hospitals are overwhelmed. In addition to uncertainty about how the government will manage the pandemic, China’s financial markets remain vulnerable to political intervention.



With recession risks looming and expectations of further interest rate hikes, equities and bonds fell in December, repeating the pattern seen for much of 2022. Cyclical sectors lagged, including consumer discretionary and technology, while defensives – such as healthcare and utilities, as well as energy – outperformed. With its defensive bias, the UK stock market was one of the best-performing regions, but it too ended the month in negative territory.

Despite the clear positive developments in China with a renewed focus on economic growth, we continue to see some specific risks linked with the lack of political transparency. As a result, we remain somewhat cautious on Chinese equities and prefer playing the expected improvement in economic activity through broader emerging market funds, including a play on Asian consumers.  

Meanwhile, the Bank of Japan (BoJ) surprised markets by changing its long-standing government bond policy. The changes included raising 10-year bond yields to 0.5% from 0.25% – meaning bond prices fell. Our portfolios have a large underweight to Japanese bonds as we had been expecting a change in policy.



Our recent decision to reduce exposure to US equities and increase US Treasuries has worked well. However, we expect further headwinds from weaker economic activity and still determined central banks, according to Lilian.

He said: “Although it’s too early to say the double bear market in both bonds and equities is over, we believe the environment will turn more positive for bonds before it does for equities as the peak in interest rates approaches.”

The economic outlook continues to weaken, which in the past has resulted in above-average returns for government bonds. Our internal recession indicator suggests the US economy is likely to contract during the next 12 months. A warning signal, in particular, is last month’s inversion of the yield curve. On average, government bonds outperform equities when the yield curve inverts.

Government bond yields are now at their most attractive in a decade, and a US recession is likely to be more negative for equities than for bonds. Our portfolios are starting 2023 with a cautious positioning although we think there will be opportunities as the year progresses. We’ll look to dial up risk when we see signs of leading economic growth indicators potentially ticking up or when earnings expectations more accurately reflect recession risks.

Catch up with all our latest views through our insight articles and weekly podcasts.

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.