MONTHLY UPDATE: Inflation appears to have peaked
WHAT’S HAPPENING IN FINANCIAL MARKETS?
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.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
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.