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Investment Monthly

Higher for longer
06 October 2023
    Download the full reportPDF, 4.38MB

    Key takeaways

    • Riskier asset classes such as equities and credits continue to price in a soft landing and do not appear to be factoring in meaningful recession concerns. We advocate a cautious approach when positioning portfolios
    • Amid a choppy outlook for stocks, we prefer high-quality bonds and the carry opportunities available in high-quality credits. These can offer attractive income opportunities while also helping avoid rising default risks
    • There are some selective opportunities among EM asset classes amid pockets of better growth, inflation dynamics and more attractive valuations. Fed rate cuts can also be a positive

    Macro Outlook

    • Inflation is moderating in the West, with ongoing signs of labour market cooling suggesting this trend may continue. Nevertheless, some components are proving sticky and may prompt rates to be kept higher-for-longer
    • Activity is especially weak in the eurozone and this is likely to continue given challenges from China’s slowdown and policy tightening to date. Growth in the US has proved resilient but may slow as consumer savings dwindle
    • Inflation is less of an issue in the East, with spillovers from China’s slowdown proving more problematic. Current policy support will help the cyclical growth trajectory but more may be needed to address structural concerns

    Policy Outlook

    • The Fed policy rate is likely at its peak as it balances its concerns surrounding lingering inflation against already meaningfully restrictive policy. We see the Fed cutting rates forcefully from Q2 2024 as recession bites
    • The September rate hike may be the ECB’s last given already slowing inflation and especially sluggish activity. Like in the US, as the eurozone tips into recession, significant policy easing is likely
    • Further monetary easing cannot be ruled out in China, while more fiscal support is needed in order to sustain a recovery. Meanwhile the Bank of Japan still looks likely to dismantle its yield curve control framework