At a glance
- Equity prices continued to fall across the board last week due, in part, to mixed company earnings reports and ongoing geopolitical concerns. Growth sectors like technology have lagged recently, given the mixed results from the quarterly earnings season so far. More defensive sectors, such as utilities and health care, have fared better. In contrast, safe-haven assets, including government bonds and gold, posted positive returns.
- While US stock prices continued their downward trend, the US economy grew 4.9% in the third quarter, mainly driven by government, consumer spending and inventories. However, we think US growth has peaked and expect activity to slow as the broader economy starts to feel the effects of higher interest rates.
- Therefore, we don’t expect the Federal Reserve (Fed) to overreact to the strong growth reading, especially as inflation, from a still elevated level, continues to moderate. Instead, we think it will keep interest rates where they are before cutting around mid-2024.
- In Europe, bond prices rose after the European Central Bank (ECB) left interest rates unchanged at 4.5%. President Christine Lagarde sounded cautious on economic prospects and noted that the central bank’s policies to reduce inflation are feeding through to the economy. Last week’s economic data showed manufacturing and services output contracting across the Eurozone (and the UK). We continue to think that interest rates have peaked in the Eurozone.
How we’re positioned in flagship portfolios
Our expectation for weakening economic and earnings growth prospects underscores our current unchanged positioning. We still hold more US, Eurozone, and UK government bonds relative to our long-term allocation and are less exposed to riskier bonds.
We also hold fewer equities relative to our long-term asset allocation. The majority of those we hold are large, high-quality companies. This includes so-called low volatility companies across the US and Europe, which have fallen less than the broader market in recent weeks.
We’re keeping a close eye on market developments, particularly potential opportunities from certain equity markets that have fallen by around 10% since their peak in late July 2023.
What we’re watching
- The Fed meets on Wednesday, and we believe it will keep interest rates in the 5.25-5.5% range. The Fed meeting comes before key data releases on the labour market and services activity (both on Friday).
- The Bank of England (BoE) also meets this week (Thursday), and the case for holding the Bank Rate at 5.25% has been building up recently, given disappointing economic data. Inflation remains elevated in the UK, though, which could be a consideration for raising rates again.
- The third quarter economic growth report for the Eurozone is on Tuesday, with the consensus expecting a slight contraction. Our view is that we’ll see a mild recession (two consecutive quarters of negative GDP growth) in the Eurozone, and we’re positioned as such: we own more government bonds and low-volatility equities than normal.
- Eurozone inflation is also due on Tuesday. It is expected to slow sharply to about 3.4% from 4.3% last month as demand slows and given the drop in petrol and diesel prices during the first two weeks of October. Core inflation, which strips out volatile components such as energy and food, is likely to have slowed too, but more moderately, to about 4.2% from 4.5% in the previous month.
Data as of 01/11/2023. 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.