Investment Monthly July 2023
Policy pause
04 July 2023
Key takeaways:
- Overall, we continue to argue for a defensive portfolio positioning. Our central scenario is consistent with “choppy waters” for risk assets over the next 12 months, with downside risks to credit and equity prices
- Short-duration fixed income remains attractive, especially US Treasuries, which can outperform in a recession. There are good income opportunities in high-quality credits, with solid balance sheets reducing default risk
- We are positive on many EM asset classes given lower valuations, cautious investor positioning and a much better macro outlook vs DMs. The prospect of Fed cuts and further dollar weakness later in the year is also supportive
Macro Outlook
- Western and emerging economies look out of sync. The West is pressured by sticky core inflation, higher interest rates and tighter lending conditions, while emerging economies face a much more benign outlook
- In the West, leading indicators are pointing towards recession. We anticipate this happening towards the end of the year, as corporate pricing power diminishes and labour markets soften
- While a softening in external demand may hamper trade flows, emerging economies continue to benefit from lower inflation, tailwinds from China’s reopening and a weaker dollar
Policy Outlook
- The Fed is likely at peak hawkishness having paused its hiking at its most recent meeting. While a further 25bps of tightening could occur, we believe the first Fed rate cut will come at the end of 2023
- Fiscal policy may not add meaningful support following on from debt ceiling related challenges, but significant austerity is also improbable. This may help cushion the economy in the event of a recession
- Policy is set to remain accommodative in China, but any major stimulus on either the fiscal or monetary front looks unlikely. In Japan, a measured normalisation of the BoJ’s yield curve control framework looks probable