Back in early-September, we asked industry commentators to share their views about what they think will unfold in markets in the coming weeks:
‘Stagflation is upon us’
Ben Gutteridge, director, Invesco MPS
With major western economies teetering on recession, and inflation sky high, stagflation is essentially upon us. Leading indicators point to a fall in US inflation in the coming months but should pricing pressure reignite then the Federal Reserve would likely show its teeth once again, delivering chunky interest rate hikes to cull inflation’s menace.
Therefore, growth forecasts would likely fall and equities might experience another bout of selling. This time around, however, longer-dated bond yields could start to fall, too, anticipating a future ‘dovish’ pivot once inflation had been purged.
Long-dated and high-quality bonds may still have a role to play in a balanced portfolio therefore and, perversely, might be something of a hedge against resuming inflationary pressure.
‘Strong businesses will only get stronger’
Fred Mahon, co-manager, CH UK Equity Growth Fund
Quality UK growth names will not disappoint over the next five years. There is no doubting the short-term economic outlook is difficult, but I am confident that exceptional businesses, such as Halma, Croda and Experian, to name a few, will survive and thrive during the years ahead.
If the Covid period has taught us anything, it is that strong businesses only get stronger through difficult times, as their superior client offering and balance sheets allow them to take market share from struggling peers.
Adding to quality names after the sharp sell-off that we have seen is a rare opportunity we expect to yield high returns to patient investors.
‘Start of deglobalisation’
Henry Cobbe, head of research, Elston Consulting
The tragic Russia/Ukraine war and an increasingly assertive China marks a start of deglobalisation. Wartime-style economic self-reliance will become more in vogue than just-in-time trade dependency.
Regardless of who wins the leadership race, the Tories will lose the majority of their ‘red wall’ seats in the next election. Votes were lent, not given. Politicians will prioritise supporting growth over fighting inflation, but only after it’s too late to avoid a painful recession.
UK inflation will remain higher for longer, linked to the ongoing energy crisis and war in Ukraine and will moderate to a higher than pre-Covid norm.
‘Commodities tailwind’
Flavio Carpenzano, investment director, Capital Group
Emerging local currency debt has been the fastest-growing segment of the emerging market debt asset class and is now the largest part of the universe. Compared with developed markets, emerging market (EM) central banks are much more advanced in their policy tightening as they use more orthodox monetary policy and increased the rates ahead of higher inflation.
Additionally, the increase in core inflation has generally been more modest. Positive real yields and more muted inflation suggests good value in EM duration. EM currencies remain undervalued, but selectivity remains crucial in assessing mainly those currencies from commodity exporting countries.
We still have a constructive view on commodity prices because supply shortages haven’t been alleviated. As such there is still a structural tailwind for commodity prices.
‘A more constructive backdrop for markets’
Christopher Rossbach, CIO, J Stern & Co
There are reasons to believe Europe will get through this winter. To the extent Russia will want to maintain leverage on Europe, it cannot be interested in a complete replacement of supply. The limited resumption of grain exports from Ukraine is a sign of strategic engagement.
Meanwhile, European measures to replace energy sources and protect industries (and consumers) are put in place; price increases should lower demand. If these supply responses in labour, goods and supply chains happen, it seems likely inflation will fall in 2023.
The easing of inflationary pressures, a reduced need for tough monetary action and a resumption of GDP growth should provide a more constructive backdrop for markets, and faster than investors expect.
‘We are about to reach an inflection point’
Tatjana Puhan, deputy CIO, Tobam
After more than seven years of a massive increase in equity market concentration due to the consumer growth-driven momentum in tech company valuations, we are probably about to reach an inflection point once we enter a recession, with consumers having less money in their pockets.
This will lead to a reconsideration of the high excess valuations of the largest stocks in cap-weighted indices that are only justified for as long as these mega-caps continue to grow at excessively higher rates than the rest of the market over the medium- to long-run.
History shows this is difficult to maintain for most companies and sooner or later, the concentration regime mean reverts.
This article first appeared in the September edition of Portfolio Adviser Magazine
