Monthly update: Our views on inflation, recession and recovery

• With inflation elevated, interest rates rising and economic growth slowing, June concluded a second quarter of negative returns virtually across the board – with stocks, bonds (including inflation-protected bonds), industrial metals and gold falling. Such a broad sell-off is very rare, last seen in 1981.

• China remains on a different path to most of the rest of the world, however, seeking to spark growth. The country is therefore showing promise for investors.

• We’ve also seen the UK Prime Minister resign following pressure from his party. But while that’s obviously big news within politics, and could potentially affect the government’s economic policy, we wouldn’t expect it to have a large impact on global markets.

• We’re seeing much media talk of recession, but markets tend to prepare themselves in advance and they’ve already started factoring it into asset prices.
  

China

Chinese stocks bucked the current trend and were positive over June, boosted by government measures to stimulate the economy. Our Chinese equity holdings therefore supported performance.

Healthcare

The healthcare sector remains a major part of our investments and has been less affected by current market challenges. It remains attractively valued too.

Europe faces particularly harsh economic challenges from current conditions – the continent has been strongly dependent on Russia for its energy, and several countries warned of supply reductions in June. Our low exposure to European equities has therefore been good for portfolios and funds.

Inflation

Inflation remains the biggest driver

Inflation is reaching multi-decade highs and interest rates are rising at their fastest rate since Blur and Oasis battled it out in the charts in the mid-90s. It all comes down to one basic question – when will inflation peak? We still expect it to start settling in the US later this year - commodity prices fell in June, with industrial metals dropping sharply. But October’s expected energy price rise in the UK will probably see it stay higher for longer on these shores. That’s one of the reasons why we’d already reduced our exposure to inflation-sensitive growth stocks and mid-caps in the UK, focusing instead on more resilient, larger companies.

Economy

Which way next for the economy and markets?

The World Bank has lowered its global growth forecast to 2.9% from 4.1% for the rest of 2022, and concerns about a recession are growing. We’ve always seen a link between inflation and recession, so if US inflation falls, the US Federal Reserve shouldn’t need to raise rates to a level that reflects such a slow-down. It’s worth noting that, in the past, stock markets bottomed out before a recession was declared and actually started recovering during the downturn. Lilian Chovin, Head of Asset Allocation at Coutts, explains: “Markets can sniff out a slow-down and adjust accordingly. We believe they’re more focused on the type and depth of a potential recession, rather than the likelihood of one. In many ways, the prospect is already old news, and markets have already started pricing it in.”

Emerging markets

Are emerging markets on the mend?

Emerging markets suffered a sharp slow-down a little earlier than the rest of the world this year, and there’s evidence they may be emerging from the quagmire sooner too. While their stock markets have fallen, the drops have been less than many other parts of the world. They’ve been bolstered by China’s push to stimulate economic growth as the world’s second largest economy is so influential for the region. People and businesses in China are starting to borrow more, its exports are increasing and a recent Purchasing Managers’ Index – which measures economic trends in manufacturing – showed improvement.