The calm before the (potential) storm

Markets and investment update
September 11, 2023

At a glance

Last week was relatively quiet regarding economic releases and the same can be said for equity and bond markets, which ended the week only slightly negative, while the US dollar rose. The performance of our flagship portfolios remained relatively flat across the week, supported by our position in Japanese equities, which bucked the market trend and outperformed. Japanese equities have been a standout performer this year and we are watching the asset class closely, in addition to reviewing our wider Asia-Pacific equity view.
The subdued market performance was mainly due to the upbeat ISM services survey for August and rising oil prices. The stronger ISM increase vs consensus revived expectations that the US Federal Reserve (Fed) could increase interest rates one last time in 2023. But we caution against reading too much into each single data point given that central banks have abandoned its forward guidance (an indication of what it might do under certain conditions), which has been a source of market volatility. That being said, our US government bond position has remained flat across the week, supporting the markets’ (and our) view that a peak in interest rates is in sight.
For now, the US economy remains resilient. However, the longer borrowing costs remain high, the more households will feel the financial squeeze. This is casting doubts on whether US consumers will replicate the summer spending surge. An economic slowdown and/or mild recession remain likely, in our view, and with bond yields remaining at elevated levels this year we continue to find good value in high-quality bonds.
In addition, oil prices rose to USD90 per barrel on the back of extended OPEC+ production cuts (until the end of the year). This added another layer of inflation uncertainty for the last part of 2023, even though inflation too appears to have peaked and, from a high level, is coming down. The scale of further oil price rises is somewhat capped as demand is anticipated to slow.

How we’re positioned in flagship portfolios

We haven’t changed our short-term tactical asset allocation so still hold more high-quality bonds, less high-yield credit and fewer equities relative to our long-term strategic allocation.

This means we are moderately defensive in our asset selection, opting for a higher-than-normal low-volatility equity exposure in the US and in Europe, as well as high-quality developed market government bonds.
Despite holding fewer equities than normal, US equities (a high-quality market) still make up a significant part of our overall investments. This allows us to cushion the impact of a market downturn while still being able to capture some of the upside should the equity rally continue.
Our fund and stock selection has moved in line with the market, given our balanced selection of different investment styles in each. Year-to-date, our global portfolio of direct equities has outperformed.

What we’re watching

On Wednesday, US inflation will be released, which economists anticipate may have risen for the second month in a row. So far, the markets have been doubtful that the Fed will increase rates again this year (we expect a final rate increase), but a higher-than-expected inflation reading may change this view.
The European Central Bank (ECB) will kickstart the September central bank meetings on Thursday. We expect a quarter of a percent increase to 4.5% for the main refinancing rate, although the ECB may decide to postpone it to October.
Despite the slowdown in growth, central banks will likely keep interest rates elevated to bring down inflation further, before relaxing rates at some point in 2024. We believe we’ll see a peak in interest rates in this last part 2023 which, combined with slowing growth prospects, makes high-quality government bonds attractive.

Past performance is not a reliable indicator of future returns.

Market Performance

Cumulative Total Returns (Local Currency)	1W	1M	YTD	1Y	3Y	5Y	Yield	P/E Ratio
STOCK MARKETS
World Large & Mid Cap	-1.3%	-1.4%	13.1%	12.0%	25.3%	43.0%	2.3%	16.1
US	-1.3%	-0.7%	17.3%	12.3%	35.6%	62.6%	1.6%	19.2
Eurozone	-1.2%	-1.1%	12.5%	18.8%	33.6%	32.6%	3.9%	11.9
UK	0.3%	0.0%	2.9%	5.8%	37.0%	19.5%	4.6%	10.5
EM	-1.2%	-2.9%	2.9%	1.9%	-3.1%	12.3%	3.1%	12.1
Japan	0.4%	2.5%	27.1%	23.0%	55.6%	59.8%	2.5%	15.2

BOND MARKETS
UK Government	-0.4%	-0.8%	1.7%	-3.4%	-18.2%	-9.7%	3.3%
US Treasuries	0.0%	-0.2%	-4.1%	-7.3%	-31.9%	-19.9%	4.6%
Euro Government	-0.3%	-0.9%	0.0%	-2.0%	-15.2%	0.7%	4.6%
Global Corporate	-0.5%	-1.2%	2.4%	3.2%	-14.1%	1.2%	5.4%
Global High Yield	-0.3%	-0.3%	6.3%	9.0%	-0.6%	10.6%	9.2%
EM Sovereign Hard	-0.6%	-1.3%	3.3%	5.2%	-14.4%	0.7%	8.2%

COMMODITIES (USD)
Gold	-1.1%	-0.3%	5.2%	12.3%	-0.7%	60.3%
Brent Crude Oil	2.4%	5.8%	10.4%	12.8%	86.0%	41.5%

CURRENCIES
GBP EUR	-0.7%	-2.3%	0.0%	7.0%	-9.2%	-7.4%
GBP USD	-0.3%	0.1%	3.2%	1.3%	5.7%	4.2%
EUR USD	-1.0%	-2.2%	3.2%	8.4%	-4.0%	-3.5%

Data as of 08/09/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.