Back-to-school: three key subjects for investors

But re-accelerating US demand is now challenging that progress. The Fed’s answer is a ‘peak and plateau’ policy. In other words, keeping high interest rates in place for longer. But if demand stays strong, the Fed may have to raise them even further, risking a sharper economic downturn.

The picture in Europe is different. Here, both inflation and growth are losing momentum. Monetary policy is working, and given the growth risks, more rate hikes don’t seem necessary. The eurozone should post just-positive growth this year.

In China, property sector stresses continue to drive private sector deleveraging. We have downgraded our growth outlook for China for 2023 and 2024. More ambitious policy stimulus is needed, targeting domestic demand and income transfers to households.

Divergence in growth between regions presents opportunities for investors and requires nuanced tactical choices.

In our global investment strategy, we underweight risk assets slightly, balancing the positive impact of disinflation with the negative impact of slower growth and higher rates.

Our strongest preference is for high quality fixed income, where we favour government bonds, US Treasuries in particular. We also like European investment grade credit, and in emerging markets, we maintain a neutral stance, preferring local currency bonds.

In equities, we remain broadly neutral. A peak in rates usually signals a tipping point. What happens next depends on how growth and inflation interact. Regionally, we prefer non-US markets, but have reduced exposure to Chinese stocks.

In currencies, we remain neutral on the US dollar, which is supported by high interest rates, but capped by expensive valuations. We expect the Swiss franc to remain strong, and the euro to appreciate medium term. The yen should remain weak.

The global economy is experiencing profound change. Geopolitical competition, environmental transition, and technologies such as AI, are all creating or reshaping investment opportunities.

We continue to position our investment strategy to benefit from these new sources of growth, while strengthening portfolio resilience.

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It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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