A brighter outlook, US resilience and diversification still key – our latest market views

The outlook for the rest of 2023 appears to be looking much more positive as we see inflation continue to fall while economic growth holds firm.

A prime example of this is the all-important US which has seen core inflation (which strips out fast-changing fuel and food prices) fall consistently since March. And that’s despite its economy still growing and its labour market showing no signs of cracking.

This is what our experts covered at our recent Quarterly Investment Update event.

Coming into 2023, there was an expectation that the US would fall into a recession. However, given the resilience its economy has shown so far this year, there are signs the tide could be turning. The US may have reduced the likelihood of a recession. And even if it does have one, it’s likely to be mild.

“We haven’t seen a recession in the US and we are unlikely to see one this year,” Lilian Chovin, Head of Asset Allocation at Coutts, said at the event. “Growth has actually rebounded and consumer demand has been resilient despite high inflation, which has created an attractive backdrop for equity markets in particular."

Another reason the US economy has continued to show strength is through its Inflation Reduction Act which was passed last summer. “This fiscal stimulus has been hugely significant,” Lilian explained. “As well as the billions of dollars spent, the bill included incentives to support manufacturing and build factories in the US, which meant the impact of the policy has been much larger than the spending numbers imply.”

All eyes on China

Second only to the US, China is one of the largest economies in the world. And at the beginning of the year, analysts expected a surge in activity as China relaxed its Covid lockdown.

“The US may have defied all the negative predictions to become much more resilient, the opposite could be said for China this year,” Lilian said. “As China relaxed its lockdown provisions, there was an expectation of high consumer demand which just hasn’t been the case.”

He added that there’s been a deleveraging process in the Chinese property sector which has been weighing on growth sentiment. There have been two consequences of this – one good, one bad.

“On the one hand we’ve seen weaker economic growth in China which has helped bring global inflation under control,” he said. “China is a large distributor to the world and, with its ‘global growth engine’ not at full capacity, there’s less risk of it overheating.

“On the other hand, lower Chinese growth means lower global growth and so other sectors and regions will be impacted, like Germany for example.”

In our own client funds and portfolios, we don’t have a dedicated position on China, as we continue to monitor the elevated risk associated with the region and its expected political intervention. We do however have indirect exposure via emerging market funds.

Our portfolios – diversification, diversification, diversification

Diversification is paramount when it comes to managing our client funds and portfolios, the audience heard. Here at Coutts, we are described as a “top-down investor”, according to Arti Ladha, Portfolio Manager.

“We typically look at the big picture factors that impact the economy and markets,” she told the audience. “GDP, interest rates and employment levels are just a few things we take into consideration when carrying out our investment decision-making.”

We offer multi-asset portfolios which use a combination of both equities and bonds. The make-up of these portfolios depends on the risk preferences, but our Balanced mandate is typically divided 55%/45% for equities and bonds. That can change slightly, though, depending on where we see opportunities.

Within these portfolios, we aren’t just diversified across asset classes but regions as well, Arti said. One example is our adjustment to our government bond allocation last year where we shifted solely from UK government bonds to G7 bonds. Constructing portfolios in this way allows us to manage this risk and helps us aim to deliver more consistent returns.

Always remember, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

Past performance should not be taken as a guide to future performance. The value of investments, and the income you get from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short term goals.