Although we didn't predict this sequence of bank stress events, our portfolios were already positioned conservatively, given the recessionary outlook. For example, we’re defensively positioned on equities, and our holdings include an allocation to healthcare which holds up relatively well in a high inflation as well as recessionary environment. We also have a strategically high allocation to government bonds, which have returned to their portfolio protection role and provide useful diversification.
Most of the interest rate hikes are now in the rearview mirror, with one more increase likely this year in the US. Much will depend on economic growth and inflation data from here. With the tightening cycle slowing, the market narrative shifts from inflation to recession.
The stress in the banking sector has increased the likelihood of tighter bank lending conditions and by extension, an increased risk of US recession.
Monique notes: “Historically, stock markets have a tendency to trough before the low point in the economic cycle and can start recovering during the downturn. Therefore, recessions can provide the investment opportunities of assets at attractive valuations.”
We have reduced our exposure to US equities on the back of a weaker outlook for US company earnings, and used some of our cash allocation to buy US government bonds and emerging market equities.
Easing inflation and higher yields makes US Treasuries more attractive than cash. The US is further along the interest rate hiking cycle, and the expectation of a pause in rate hikes should also benefit bonds.
The Purchasing Managers’ Index (PMI) data indicates that emerging market and Asian economies are leading the rest of the world in terms of their growth outlook. We expect the reopening of the Chinese economy to provide a further boost, and the possibility of a peaking US dollar supports our increased allocation to emerging market equities.
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.
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.