Columbia Threadneedle Investments’ multi-manager team has sounded a warning over increased volatility ahead.
In commenting on the fourth quarter outlook for investors, investment manager Anthony Willis noted how resilient consumers in Western countries have been despite rising interest rates. So far, at least.
“It’s that time of year when shops start filling with Christmas goodies, the clocks have gone back, leaves are falling, and the kids wrap up warm for a fireworks night out,” Willis said.
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“It is also the time when investors consider what’s in store for markets over the final months of 2023. It’s been a stronger year than expected for Western economies and we’ve seen some decent returns in certain equity markets. No doubt the economic data is on a weakening trajectory.”
Willis noted that growth in the US remains solid, despite the aggressive rate hiking cycle. The UK and eurozone economies are significantly weaker, but still positive.
“A common theme across the US, UK and eurozone is consumer resilience, in spite of higher food and energy bills and housing costs for those that have had to refinance their mortgage or pay higher rental costs,” Willis said.
“It’s clear that the pass through from higher interest rates has had a longer lagged effect than in previous cycles thanks to mortgages being held by a lower percentage of households, and those with mortgages generally having fixed for at least two years, meaning a lower proportion of households have immediately felt the pain of higher interest rates,” he explained.
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Willis said that the consumer resilience shown was allowed for by pent-up savings and transfer payments from the time of the pandemic. Consumers have been able to draw down on these excess savings over the past 12 months to ‘substantially cushion’ the impact from the rising cost of living.
These savings are now reaching the point of exhaustion, and this reality is crucial to understanding the near-term prospects for markets, Willis said.
“A key factor in our view that consumption will weaken over the coming months is the data showing these savings are close to being exhausted. Labour markets and wages have also shown considerable resilience over the year, with unemployment rates creeping higher, but not yet at a pace to weigh on consumer sentiment. Leading indicators on job openings and temporary staffing do suggest that we will see unemployment increase in 2024.”
He added that rate hiking cycles are yet to fully impact economies, but will be felt in the coming quarters. This will cause a decline in economic momentum, which in some economies could go as far as a recession.
“As we gaze into the future we do see the economic headwinds increasing and are also cognisant that if we do escape a recession and fall into the ‘soft landing’ zone, that may well mean interest rates need to stay elevated for even longer to ensure inflation is defeated,” Willis noted.
“We continue to have a relatively cautious view of the world but, as always, need to balance macroeconomic fundamentals with a view of whether that news is in the price.”
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“Given the very sanguine, near complacent, market mood the past few weeks, we do think that we will see volatility pick up, but that is no bad thing for the opportunistic and stockpicking managers we seek to invest in,” Willis added.
Willis further noted that while short-term pain appears to be on the horizon, an economic and earnings recession would be likely to prompt interest rate cuts and prove to be a positive ‘reset,’ not a prolonged period of weak growth with elevated inflation and rates.
