investment insights
Investing in a higher-for-longer rate environment
The economic brakes are on for the last quarter of 2023.
That should keep global growth weak as services slow to match manufacturing.
The Federal Reserve and the European Central Bank are both running ‘peak-and-plateau’ strategies, keeping interest rates high and limiting growth for longer – with the full impact yet to be felt. In addition, we see new growth risks – especially from rising oil prices.
The American economy’s rosy exterior makes the outlook unusually hard to read. Housing, manufacturing and credit are all suffering, while consumption and labour markets hold up. The US has avoided a recession for now, but its gap with other major economies is widening.
Globally, disinflation is encouraging, even if the path to lower price pressures is uneven because the prices of services take longer to adjust than those of goods. Although unlikely, high oil prices threaten a second wave of inflation.
Managing these inflation risks is key for central banks and any relief from rate cuts is unlikely before mid-2024.
These are all good reasons for a cautious investment strategy, balancing recent macro resilience against the lagged effects of high rates.
Our balanced global equity allocation focusses on regions with better outlooks. Stocks usually deliver positive returns late in the economic cycle. Volatility is also typical, and this time should be no different. While valuations are in line with long-term averages and many earnings revisions have been positive, 2024’s expectations may prove too optimistic.
Government bond yields, particularly longer-dated ones, are still rising, offering increasingly competitive expected returns. With growth slowing, and markets pricing peak rates, we maintain our preference for US Treasuries. Tight financial conditions also mean we favour investment grade bonds over high yield credit.
Oil prices have risen and we think Brent crude will trade around USD 90 per barrel over the coming months. And in currency markets, the US dollar is benefiting from the American economy’s growth and yield gaps with the rest of the world, and higher energy prices. We see more dollar strength against the other major currencies.
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