Previous investment market updates

A decisive move by the US Federal Reserve to cut interest rates for the first time since 2020 helped markets recover from a disappointing start to September.

The US Federal Reserve (the Fed) has officially started cutting interest rates by lowering them for the first time since 2020. A rate cut of 0.5% was well received by investors after a wobbly start to September.

Markets kicked off the month on the back foot as concerns grew over the strength of the US economy. An easing jobs market and slowing economic growth caused stock markets to slide.

But some positive economic numbers announced in the second half of the month – causing real-time economic growth rate to track at roughly 3% – along with the Fed’s rate cut and a large stimulus from China, buoyed global stocks to finish strong.

The team at Coutts who manage the funds behind Royal Bank Invest feels encouraged by what the Fed said after the announcement.

Lilian Chovin, Head of Asset Allocation at Coutts, said: “The Fed is confident that it’s getting inflation under control and said it will now support the US jobs markets and economic growth for as long as it’s needed.”

The Fed’s widely anticipated move was its first rate cut since March 2020, back when the world was battling the Covid pandemic.

A larger than expected interest rate cut of 0.5% didn’t come as much of a surprise to us as the central bank has a lot of ground to make up before the end of the year.

The Fed had suggested for the past few months that interest rates would drop by 1% before January – but with only two more announcements expected to happen before then, it was highly likely they’d get the ball rolling now, and at some pace.

Inflation is falling towards the Fed’s 2% target and early estimates of economic growth show the US still holding up well – it’s slowing but still firmly in positive territory.

Elsewhere, the European Central Bank cut interest rates again by 0.25% while the Bank of England kept rates unchanged. In contrast to the rest of the world, the Bank of Japan is actually raising rates generally, but held them unchanged at its last meeting. These announcements were highly expected and had minimal impact on market performance. 

The experts at Coutts were unfazed by the weak data that came out before the Fed’s announcement.

Lilian said: “Slowing economic growth is a normal part of the business cycle so this was something we were expecting.

“Company earnings remain strong so this transition to a slightly slower rate of growth doesn’t impact our outlook for now, especially as the Fed cutting interest rates should help support economic activity.”

Coutts continues to hold more stocks in funds and portfolios compared to their benchmark as they typically perform well during periods of slowing but positive economic growth. But in case of any uncertainty ahead, they also hold government bonds for good diversification.

While their overall bond allocation is balanced compared to benchmark, they’re underweight Japanese government bonds and slightly overweight US and European government bonds as they take different approaches to interest rate changes. 

While much of the world’s economy is showing signs of resilience, China’s in need of a helping hand. A struggling real estate market and stagnating economic growth has meant the country’s central bank has had to step in.

Restrictions have been eased on borrowing money to invest in the Chinese stock market, the level of cash reserves banks must hold has been reduced to encourage lending, and mortgage rates have been cut by 0.5%.

This stimulus in China could have a positive impact into Europe. For example, the affluent middle class in China is a key market for European luxury goods companies. So any excess cash heading their way could quickly be spent on some high-end fashion brands, some of the largest companies in Europe. More broadly, a rebound in Chinese economic growth would be good news for global growth who have relied heavily on the US engine for some time. 

It was a bumpy start to the month but markets soon recovered, and conditions still look good for stock markets despite slowing economic growth.

Markets have moved back up to where they were before investor worries about US jobs numbers caused uncertainty a month ago.

The recovery comes after markets realised signs of the all-important US economy slowing down weren’t as worrying as first thought.

There is also some investor excitement around a potentially return-supporting interest rate cut coming soon in America – the first there in four years.

Experts at Coutts bank who manage the funds behind Royal Bank Invest feel current conditions continue to support stock markets.

Joe Aylott, Investment Strategist at Coutts, said: “The US economy is slowing down but it’s still growing, and companies are performing well, as shown by a recent run of positive financial results announcements.

“We expect some occasional market fluctuations between now and the end of the year, after a remarkably strong first six months, as the economy slows and markets digest US election uncertainty. But overall conditions remain solid for investors.”

Inflation – a key worry for investors for a long time – has now settled down and interest rates are being cut around the world as a result. This could be good for investors as lower rates encourage people to borrow and spend, which can boost company profits and support share prices.

The UK’s Bank of England and the European Central Bank have already cut rates, as have other central banks around the world. But crucially, the US, which influences markets worldwide, looks almost certain to do the same soon. The head of America’s interest-rate setting central bank the US Federal Reserve, Jerome Powell, recently gave his strongest hint yet that US rates would drop this month.

Meanwhile, we recently had ‘earnings season’ – a period of financial results announcements from companies around the world. For the most part, it showed companies doing well, with the majority of businesses announcing numbers above market expectations – more good news for investors.

Looking ahead, analysts expect third-quarter US earnings to continue to grow year-on-year, with trends broadening across the market. And while European earnings growth is expected to be modest in 2024, it's predicted to improve significantly in the coming years.

The Coutts team still feels positive about investing in stocks over bonds given the current climate. They therefore hold more stocks than their benchmark. But with some more uncertainty expected this year as the economy slows, they’re keeping their investments well-diversified with US government bonds.

Generally, if stocks fall for economic reasons, bonds tend to rise, so this positioning should help during any market fluctuations.

Other relatively recent developments include moving their investments out of high yield bonds and into global credit to reflect changing market conditions.

Markets experienced some disruption this week but the US economy continues to grow at a healthy pace despite signs of a slow-down. This ongoing growth, backed by solid company performance and highly anticipated interest rate cuts, means current conditions still support investing.

The world economy remains resilient despite Monday’s market volatility.

Stock markets fell after US jobs numbers released on Friday raised concerns about an economic slow-down.

But the experts at Coutts bank behind the Royal Bank Invest funds say the US economy is resilient and shouldn’t slow down massively.

Lilian Chovin from Coutts’ investment team says, “There appear to be few reasons for the falls we’ve seen. The US economy is slowing but continues to grow, companies are still reporting solid profits and the chance of an imminent recession is extremely low. Overall, conditions remain positive for stocks.”

Higher unemployment and slower economic growth in the US mean its central bank – the US Federal Reserve – is now much more likely to cut interest rates in September. They may also cut them by more than previously expected – 0.5% instead of 0.25%.

This could lower companies’ borrowing costs while encouraging people to spend rather than save, which could all be good for share prices.

The Bank of England already cut interest rates for the first time in four years last month, from 5.25% to 5%, and several other central banks around the world have done the same.

The Coutts’ team had already seen that the US jobs market was starting to weaken, but they could also see that underlying economic conditions remained solid. So they still prefer investing in stocks, and recently positioned their holdings so they were more globally focused.

They also bought more US government bonds at good prices, investments which should benefit from tamer inflation and strong chances of interest rate cuts. And they moved their investments out of high yield bonds and into global credit to reflect changing market conditions.

US jobs numbers dropped to the point where they triggered what’s called the ‘Sahm rule’ – which measures when there might be a recession. That was one of the main things that spooked investors. But it came about for a very different, more positive reason than usual.

Lilian explains, “The Sahm rule is usually triggered by people losing their jobs and therefore spending less money, which slows economic growth. But this time around unemployment has risen because there are more people in the US looking for work, partly because of immigration, and therefore considered unemployed. So the situation is a lot less sinister than the Sahm rule would normally suggest.”

Meanwhile, in Asia, the strength of the Japanese yen over the past few weeks led to a popular currency ‘carry trade’ unravelling – a technical trade that aims to benefit from the difference in currency rates. This caused a lot of disruption in markets and contributed to recent volatility, but it’s a technical development rather than anything fundamental to the overall economy. 

The global outlook for stock markets stays upbeat after strong company performance, while bonds battle with interest rate expectations.

Good news continued to roll out for investors last month as solid company earnings meant stocks performed positively.

At various points throughout the year, companies report how they performed over the previous three months – a period commonly known as ‘earnings season’. The big US technology giants announced impressive numbers yet again during this last round of announcements, but we also saw other industries and regions boasting a strong three-month period.

And this had a broad-based, positive impact on stock markets.

Inflation remains at the back of investors’ minds. It continued to edge lower in the UK last month, but US inflation remains sticky at around 3%-3.5%. Generally, inflation is still above most central banks’ 2% target. This is likely to delay interest rate cuts, but investors remain hopeful that such a cut will still come this year. 

It was also a positive month for bonds, but they went through more of a bumpy ride compared to stock markets because of the interest rate uncertainty.

The European Central Bank was one of the first major central banks to cut interest rates at the beginning of June. This was good news. But it still begs the question: when will other central banks do the same thing?

The central bank committees which decide on what to do with interest rates are themselves divided on next steps.  This makes trying to predict the exact timing of rate cuts extremely difficult. And as bond prices are so dependent on interest rates, we’ve seen some volatility there. However, compared to a few years ago, government bonds are providing supportive yields, creating something of a ‘yield cushion’ against this uncertainty. 

We hold high yield bonds within our funds which perform well when the economy is healthy. A high yield bond is corporate debt, and is therefore linked to the performance of the company as well as interest rate movements. These bonds are providing even stronger yields currently, again providing a yield cushion against current interest rate uncertainty. These strong yields also help balance out the risk that comes with high yield bonds of the company missing a repayment (also known as a default).

Something that has dominated newspaper headlines, but not necessarily financial markets, was Prime Minister Rishi Sunak’s announcement that there would be a snap election in July. Political elections can sometimes cause knee-jerk reaction in markets, but typically investors focus more on economic data, such as the health of the global economy and potential implications for interest rate policy.

Monique Wong, Head of Multi-Asset Portfolio Management at Coutts, the team behind Royal Bank Invest, said: “The announcement from Downing Street had minimal impact on markets, because the event – if not the timing – was largely expected. Instead, investors focus more on the fundamental data such as company earnings, inflation and interest rate announcements.

“An election campaign could cause some noise for markets. However, our empirical work shows that elections, by and large, don’t tend to have a lasting impact on markets.”

The Coutts team behind Royal Bank Invest still sees a positive outlook for investors this year despite price rises proving sticky.

Overall, it’s been a month of ups and downs for investors as stubborn inflation and geopolitical risks took their toll a little. But the year so far remains positive.

Global stock markets have been doing well overall, led by the US but with initial signs of positivity in Europe and Asia coming through too. China’s economy grew 5.3% in the first quarter of the year, for example, according to the country’s National Bureau of Statistics.

But the elephant in the room is the aforementioned issue of inflation. It’s proving a bit sticky, failing to fall as much as initially expected. This is actually because of the very economic strength that’s been boosting stock markets. People are making money and spending it, which is supporting demand and preventing price rises from slowing.

The number of interest rate cuts markets expect from America this year has dropped as a result – from seven at the start of 2024 to just one now. This matters because lower interest rates can help boost company profits, and America is very influential on global markets.

Lilian Chovin, Head of Asset Allocation at Coutts, said: “The drop in the number of expected US interest rate cuts did cause some brief volatility in markets, but they soon recovered. Barring any major shocks, in our view we’re still seeing a positive outlook for investors this year.”

Coutts has been well-positioned for current conditions since late last year, having increased its investment in stocks.

They bolstered this pro-stock stance even further in February by cashing in some of their investments in US government bonds in February, which are more exposed to the interest rate cut uncertainty.

The team also continues to hold high yield corporate bonds, which tend to perform well when the economy expands and have been supported by interest rates peaking.

US earnings season has been in full swing, with 79% of the 400 companies who reported their performance at the time of writing beating expectations. Earnings growth for the S&P 500 is forecast to be 8.7% for this year and 13.2% in 2025, according to Bloomberg.

Coutts Senior Equity Specialist Howard Sparks said: “There have been concerns that the recent dominance of a handful of tech companies could cause a re-run of the dot.com bubble, but they appear to be misplaced, at least for now. Current valuations are backed up by solid earnings.

“As the year progresses, earnings growth from the S&P 500 is expected to broaden out beyond the so-called Magnificent 7 of Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla. But first quarter earnings were dominated by these mega-caps which provided virtually all the earnings growth during Q1.”

Investors’ optimism driven by interest rate cut expectations.

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

Stock markets across the globe have built further on their strong start to the year as investors look toward interest rate cuts on the horizon. We could start seeing them drop from June.

The US Federal Reserve said its outlook for America’s economy remained the same despite inflation being a bit sticky recently, and it shouldn’t impact interest rate cuts expected later in the year – all in all, a good sign.

And the UK stock market rode the wave of the global rally after similar news from the Bank of England. Although UK interest rates were held at 5.25% in March, governor Andrew Bailey said things were “moving in the right direction” when it came to rate cuts.

It’s a bit of a balancing act for the central banks that decide where interest rates should be. If they cut them too soon, rising prices could easily rise again, especially given the improved economic backdrop – lower rates encourage people to borrow and spend more, and save less.

Monique Wong, Head of Multi Asset Portfolios at Coutts, the bank that manages the Royal Bank funds, says: “Stock markets are currently in strong form, reflecting the health of the economic backdrop. Inflation is still edging lower, despite the odd bump along the way, which is supportive of the major central banks – notably the US – starting to cut rates toward the summer.”

While inflation is ticking towards most central banks’ target of 2%, there’s still a chance it could bounce back again – we’ve already seen a few surprises in recent months. And any developments on this will play a part in the number of interest rate cuts we see this year. Since the start of the year, the market has scaled back expectations of seven US interest rate cuts to two or three by the end of 2024.

Monique says: “The current stock market rally means our overweight position in equities has bolstered our performance. Share prices are high but our dynamic investment process leads us to lean into the improving economy backdrop. It also allows us to adapt to changing economic circumstances.”

When making investment decisions for our customers, our thought process is three-fold:

1.       We take risks where best rewarded. Any investment decision comes with an element of risk – even not taking risk could be seen as a risk. We have a framework to help ensure we take ‘good’ risks, which are those with a high probability of a successful outcome.

2.       Protection – We want to make sure we have some protection in portfolios. That’s why we diversify our investments to try to pre-emptively manage losses within acceptable limits.

3.       We look to exploit sudden market shifts. Markets can act in mysterious ways, and stressed conditions can sometimes present the best opportunities. We need to be ready to take advantage of that.

This takes form in our investment process: ‘Anchor and Cycle’.

Anchor – A priority of ours involves getting the big asset allocation decisions right and focusing on five-year time horizons. It’s about our long-term themes and appreciating that, while short-run market movements are important, it’s the long game that really matters.

Cycle – This is about where we are now in the business cycle, the current market mood and the policies coming out of governments and central banks. It involves looking at the macroeconomic environment today and making tactical moves to make the most of it.

Strong company earnings and rising employment give investors optimism for the year ahead.

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

There was a lot of economic and company data released in February, both good and bad. But the positives outweighed the negatives in investors’ minds, and stock markets saw a bit of a boost.

The global economy is holding its ground even though the UK and Japan entered a recession at the end of last year. And a handful of US technology giants managed to salvage an underwhelming earnings season. 

The US has continued to act as the stabilising force for global economic growth. The world’s largest economy grew faster than expected last year. Other good news included the country’s unemployment rate staying close to an all-time low, and inflation continuing to fall – albeit very, very slowly.

One thing that’s unclear in the US is when exactly interest rates will start coming down. Going into 2024, there were hopes that America’s central bank, the US Federal Reserve (Fed), could cut rates five or six times, starting in March. Instead, with price rises failing to slow down as much as initially hoped, markets now believe we’ll see just three rate cuts this year.

The Coutts team that manages the Royal Bank funds had already made a number of changes ahead of time, which meant they were well placed to benefit from the recent positive performance. They’ve been steadily increasing their investment in global stocks since October.

The team also bought more high yield bonds a few months ago. These tend to do well while economies are expanding and are offering attractive yields at the moment.

Lilian Chovin, Head of Asset Allocation at Coutts, says the team stands ready as always to make changes if necessary.

“While it’s been a good start to the year for markets so far, we’re still aware of the potential risks that could come further down the line, whether from geopolitical tensions or upcoming elections,” he says. “So while we’re cautiously optimistic, we continue to monitor and analyse market moves and world events closely.” 

After every financial quarter, companies announce how well their businesses have done for the previous three months. There weren’t high hopes going into the first earnings season of the year, although a small number of US technology giants, named the ‘Magnificent 7’, stole the show.

Made up of Nvidia, Meta, Alphabet, Tesla, Apple, Microsoft and Amazon, analysts closely monitored their announcements. And with the exception of Tesla, the bulk of the positive US earnings came from those six other companies.

As a result, their shares prices boomed, carrying the rest of the US stock market on their coattails.

Both the UK and Japan slipped into recession at the end of the year – when the economy shrinks for two consecutive quarters. But strong economic data and a promising outlook still pushed their stock markets higher.

The Nikkei 225 index – Japan’s largest 225 companies – even reached a 35-year high in February. This was after its companies reported good profits and a weakening yen attracted overseas business, boosting its export activity.

The UK stock market’s performance had a less inspiring month. The FTSE 100, which tends to perform better in a rising interest rate environment, finished flat in February. But the UK recession that hit the news is expected to be short and shallow, with signs that we could be out of it already.

As for when interest rates could start falling in Britain, it could be as early as the summer. Encouragingly, the Bank of England recently said inflation wouldn’t necessarily need to reach its 2% target before it started lowering rates.

Markets saw a slight wobble at the start of the year before picking up where they left off in 2023.

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

Financial markets finished off last year on a high and much of the momentum carried on into the first month of 2024 – just about. There was a bit of turbulence in the first couple of weeks, but investors then saw more positive data from the US and markets picked up again.

Inflation in the US has been edging closer to the US Federal Reserve’s (Fed’s) target of 2%, while the country’s economy has been going from strength to strength. This made investors hopeful that we could see an interest rate cut quite soon – a positive development for markets.

In December, more jobs in the US were filled, although the unemployment rate remained the same as the previous month. Also, core inflation – the price of goods minus volatile food and energy – and the Personal Consumption Expenditures – the price of goods bought by a typical household – continued to fall. These were all positive moves from an investor’s perspective.

But despite the promising news, the Fed held interest rates where they were at the end of January. In fact, Chairman Jerome Powell tried to manage investors’ expectations of when rates might start coming down. The market was forecasting the first rate cut in March, but Powell said that wasn’t the bank’s ‘base case’, and now markets think an interest rate drop is more likely in May. 

Looking at the wider world, the global macroeconomic environment looks increasingly more appealing for investors. With expectations of resilient growth, easing inflation and potential rate cuts this year – albeit starting a little later than expected – the Coutts team that manages the Royal Bank Invest funds bought more global equities.

They also sold some of their investment in US government bonds, taking profit from their strong performance over the last few months. They saw this as a good time to reduce these holdings as their analysis shows stronger growth could limit the number of rate cuts delivered by the Fed this year.

Meanwhile, the team added to its position in high yield corporate bonds in December, which tend to do well when an economy is growing. And in case you don’t know what those bonds are…

When a corporation needs to raise some money, they can issue a corporate bond for investors to buy. This is another way of getting a loan. A high yield bond is a form of corporate bond but is considered riskier because the corporation has a lower credit rating, which means they’re more likely to miss a repayment – also known as defaulting.

These corporations then have to make larger repayments (yields) to attract investors to buy the bonds because of the greater level of risk that comes with them.

But because these bonds are issued by corporations, they can perform more like a stock and less like other bonds. This makes them more sensitive to good or bad news but less sensitive to what happens with interest rates.

The Coutts team believes there’s a lot to like about high yield bonds in the current environment. High yield bonds typically perform well when an economy is growing because there’s less risk of corporations missing their repayments. With the US economy doing well at the moment, this could put high yield bonds in a good position to perform well. 

With inflation falling and talk of interest rates being cut in the US, markets have started the year in a good place.

Investment markets could have a strong year ahead as the challenges of 2023 continue to ease. Twelve months ago, a US recession that would have hit markets worldwide looked highly likely, and investors were nervous about return-denting interest rate rises.

Not so today.

Inflation has been falling and interest rate rises have been put on pause. Stock and bond markets rose in November after inflation slowed even more, and performed well again in December as America’s central bank the US Federal Reserve (Fed) suggested it could start cutting rates this year.

US inflation did nudge up a little in the 12 months to December, according to the Bureau of Labor Statistics, to 3.4% from 3.1% the previous month. But core inflation, which strips out volatile food and energy prices and tends to be what central banks focus on, still fell.

Things are a bit different in the UK. Inflation has dropped there too, so the Bank of England is broadly on the same path as the Fed, but it’s refused to speculate about when rates could drop. Any UK rate cuts are expected to come at a slower pace than in the US because inflation, while falling, is proving more difficult. 

As for that US recession, despite very strong indications of one last year as business activity slowed, it just hasn’t happened.

In fact, the US economy, so crucial to global investors, has remained solid, with low unemployment and steady growth.

America has benefitted from its people having jobs and spending their hard-earned cash as wage growth softens the impact of higher prices. Applications for unemployment benefits there fell to their lowest level in nearly three months in mid-January, according to figures from the US Labor Department. And the manufacturing and housing sectors have done better than expected too.

Monique Wong, from the investment team at Coutts that runs the Royal Bank Invest funds, says, “Against all odds, the US economy has started 2024 in a remarkably better position than forecast.

“The end of the battle with inflation is now in sight, and we’re seeing high hopes in markets of a so-called ‘soft landing’ – the sweet spot between steady inflation and a growing economy that avoids recession.”

The Coutts’ team’s analysis saw a shift in conditions last autumn and started repositioning its investments for customers accordingly. This included increasing their exposure to global stocks in good time to benefit from their improved performance.

They also sold off some of their US government bond holdings, which are likely to underperform as investors move to stock markets in light of current, positive conditions. Stocks, which can be riskier but could deliver higher returns, and relatively safer bonds tend to move in different directions depending on the market mood. And that mood favours stocks at the moment.

Despite improvements to the global outlook, things are looking less positive for the UK economy, which could even fall into recession in 2024. But Coutts currently owns fewer UK stocks than its benchmark. More broadly, the team seeks to reduce the risk of too much exposure to any one country by managing globally diversified portfolios and funds.

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

It finally happened! It really does now look like interest rates have peaked at last. Barring any sudden shocks, they look highly unlikely to go up again any time soon. As a result, stock and bond markets are delivering better results than we’ve seen for some time.

Central banks the US Federal Reserve and Bank of England left interest rates unchanged at the start of November, as inflation cooled on both sides of the Atlantic. There were comments about rates staying higher for longer, but the general market consensus is they won’t rise further. 

Most of this year has been defined from an investment perspective by rising interest rates and inflation. Higher rates encourage people to save rather than spend while raising company borrowing costs, which all hits profits and share prices. Rising rates can also dent existing bond returns by making new bonds more attractive.

This made investors rather edgy for much of the year. But with inflation falling and interest rates peaking, their confidence is increasing.

It’s not just about rising prices though. Another important factor heartening investors is the all-influential US economy remaining robust. A strong jobs market there means people still have jobs and money to spend. There’s growing optimism about Europe too, where the relatively weak economy is showing early signs of stabilising.

Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, says: “The scene is now set for markets to remain relatively positive until the end of the year. Risks remain though, such as high budget deficits and weakening jobs markets in many western countries, so we continue to monitor developments closely.”

The experts at Coutts, who constantly keep a close eye on market dynamics, had seen the potential for the tide to turn in markets. As a result, they had already made changes within the Royal Bank Invest funds to reflect the brighter mood.

Within recent months, they bought more global stocks to benefit from improved market performance, and reduced their exposure to US government bonds.

Markets were mostly unaffected by UK Chancellor Jeremy Hunt’s Autumn Statement last month, largely because there were few real surprises.

The government’s National Insurance reductions and tax breaks for businesses were perhaps another sign of more positive times ahead though. The Chancellor’s moves to give people more money to spend show greater comfort with current inflation levels – their announcements would have been unthinkable earlier in the year.

It’s fair to say that challenges remain for the UK economy, however. UK GDP has been fairly weak for much of the year, and the Office for Budget Responsibility now expects it to grow by just 0.7% in 2024, down from its previous forecast of 1.8%.

So what does this all mean for interest rates?

Lilian says, “We believe UK inflation should continue to fall this year, offering some respite for investors, but the government’s recent tax cuts may slow its decline, giving the Bank of England another reason to keep interest rates higher for longer.

“So while an interest rate cut was widely expected in mid-2024, it might not come now until late next year.”

Investor confidence has been knocked by the realisation that interest rates could stay higher for longer – causing markets to have a turbulent month in October. But this could all change in the last couple of months of the year.

October was offering plenty of tricks and not so many treats, as there was a sharp sell-off in the bond market. This was brought on by uncertainty as to when interest rates would start coming down, along with a stronger-than-expected US economy.

This may sound like bad news, however, it could actually create opportunities from an investment perspective. Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, says: “While investors were feeling positive over the summer, nerves are now getting the better of them a little. But that could be a good thing. It could mean investment opportunities lie ahead and we believe we could see markets recover over the remainder of the year.” 

Despite the uncertainty from investors, there are some positive signs ahead. Inflation is continuing to fall, economies are holding strong and there are signs we’re nearing the peak in interest rates. With this in mind, the experts at Coutts have made some adjustments to the Royal Bank Invest funds.

One change includes an increase in global stocks. This is because of the influence the US has on global markets. The country’s current economic resilience could have a positive knock-on effect on wider regions and their stock markets.

Also, the possibility that the run of interest rate rises could be coming to an end means there’s a more positive outlook for bonds. So Coutts also bought more long-dated US government bonds, which could benefit from this. 

US earning season began in mid-October – where companies report how well they’ve done for the previous three months – and there were high expectations to beat.

Some industries, like tech companies in the US, had a stellar first half of the year which meant they were under even more pressure to keep this momentum going. While announcements were positive, they still fell short of where investors thought they would be, so some big names saw their share prices drop.

Howard Sparks, US Equity Research Analyst at Coutts, explains: “We’ve seen negative market reaction to generally positive news on company earnings. With expectations being so high going into this earnings season, any signs of weakness were severely punished.”

This reaction re-emphasises the nervousness from investors and how sensitive markets can be during these times. But it’s worth highlighting that this negative reaction and related weak market performance isn’t that uncommon, and we see current levels as being potentially attractive given our expectation for things to improve for the rest of the year.

Investor confidence has been knocked by the realisation that interest rates could stay higher for longer – causing markets to have a turbulent month in October. But this could all change in the last couple of months of the year.

October was offering plenty of tricks and not so many treats, as there was a sharp sell-off in the bond market. This was brought on by uncertainty as to when interest rates would start coming down, along with a stronger-than-expected US economy.

This may sound like bad news, however, it could actually create opportunities from an investment perspective. Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, says: “While investors were feeling positive over the summer, nerves are now getting the better of them a little. But that could be a good thing. It could mean investment opportunities lie ahead and we believe we could see markets recover over the remainder of the year.” 

Despite the uncertainty from investors, there are some positive signs ahead. Inflation is continuing to fall, economies are holding strong and there are signs we’re nearing the peak in interest rates. With this in mind, the experts at Coutts have made some adjustments to the Royal Bank Invest funds.

One change includes an increase in global stocks. This is because of the influence the US has on global markets. The country’s current economic resilience could have a positive knock-on effect on wider regions and their stock markets.

Also, the possibility that the run of interest rate rises could be coming to an end means there’s a more positive outlook for bonds. So Coutts also bought more long-dated US government bonds, which could benefit from this. 

US earning season began in mid-October – where companies report how well they’ve done for the previous three months – and there were high expectations to beat.

Some industries, like tech companies in the US, had a stellar first half of the year which meant they were under even more pressure to keep this momentum going. While announcements were positive, they still fell short of where investors thought they would be, so some big names saw their share prices drop.

Howard Sparks, US Equity Research Analyst at Coutts, explains: “We’ve seen negative market reaction to generally positive news on company earnings. With expectations being so high going into this earnings season, any signs of weakness were severely punished.”

This reaction re-emphasises the nervousness from investors and how sensitive markets can be during these times. But it’s worth highlighting that this negative reaction and related weak market performance isn’t that uncommon, and we see current levels as being potentially attractive given our expectation for things to improve for the rest of the year. 

As inflation continues to ease, there’s a growing feeling in financial markets and among economists that interest rate rises could finally be nearing an end.

America’s central bank the US Federal Reserve (Fed) held interest rates steady at its most recent meeting. But with renewed strength in the economy, those rates may need to stay higher for longer to tame inflation.

The Bank of England (BoE) also left interest rates unchanged at 5.25% – the first pause since November 2021. The decision followed UK inflation dropping from 6.8% for the year to July to 6.7% for the year to August.

While this is all very encouraging, the BoE and Fed remain cautious, both stressing we’re not out of the woods yet and further hikes may be necessary.

Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, says this is only to be expected.

“Central banks don’t want to be calling victory too early and there’s uncertainty about the level at which inflation will stabilise,” he says.

“In periods where rate rises could be coming to an end but it’s by no means definite, there tends to be increased market uncertainty. There’s still some concern that more rate hikes may be necessary if inflation picks back up. After all, you only know it’s the last hike a while after it’s happened.”

The US economy shows signs of strengthening, with shoppers still spending and inflation still falling, while there’s growing activity globally too.

Historically, such conditions have been positive for stock markets. There is still a risk of a recession in the US, which would hit markets worldwide. But the Coutts team’s own recession indicator shows that the chances of one have been easing a little since February. A stabilising manufacturing sector in America even suggests the country may avoid a severe downturn.

Given this backdrop, the experts at Coutts have been positioning their investments towards new opportunities. For example, they sold some of their US government bond holdings and increased their stake in UK corporate debt, which currently offers better income.

Oil prices have surged to their highest level in more than a year, raising fears inflation could rise again. Brent crude soared to over $97 a barrel and some analysts are predicting it could even breach $100.

The spike comes after two of the world’s biggest oil producers, Russia and Saudi Arabia, announced they would extend their voluntary production cuts until the end of the year.

Lilian says it shouldn’t cause too much of an issue for the fight against inflation though.

He says, “While the rise in the oil price is not going to help inflation, in order for it to have any impact on prices it will have to remain elevated above $100 a barrel for some time.”

Why is oil important for investors?

The price of oil is a critical barometer for investors worldwide, driving major movements in the global economy and stock markets. As a core commodity, the price of oil impacts the profitability of many industries and individual companies.

Oil prices affect everything from airlines and automakers to plastic producers and shipping companies. Even small fluctuations in crude prices can have an oversized impact across industries.

Unfortunately, August was a tough time for equities. Global stockmarkets lost ground at the beginning of the month as confidence dropped due to rising bond yields and concerns about the slowing Chinese economy. However, despite that initial volatility, the market’s mood then lifted as the month went on, boosted by some strong earnings reports.

China’s post-pandemic recovery has failed to fully materialise following declining global orders for exports and sluggish domestic demand. The Chinese property crisis is also worsening, with two major developers facing severe financial difficulties. Furthermore, the world’s second-largest economy is grappling with deflation, stoking fears of Japanese-style stagnation. Chinese youth unemployment has reached an all-time high, exceeding 20%.

China’s central bank has cut key interest rates for the second time in three months in a bid to revive the economy, but most analysts agree it will have little impact. Any downturn in China is likely to weigh on Germany’s economy, which is heavily dependent on China for trade. Germany is Europe’s biggest economy and there are fears that a slowdown in China could ripple out and affect the wider euro area, which is still recovering from last year’s energy shock.

Sven Balzer, Head of Investment Strategy at Coutts, says: “Markets rebounded after some volatility, though concerns linger about slowing growth and property woes in China. Its economy was meant to drive global growth his year, so the dramatic slowdown is sending alarm bells out around the world.”

The global economic outlook is still brighter than it was at the beginning of the year. Inflation is coming down in most developed economies, interest rates look like they are now peaking, and growth remains resilient in the US. While we're still cautious overall, we've recently increased our investment in equities across our portfolios and funds, moving towards a more neutral position when compared to our benchmark).

At the beginning of the year, concerns about a potential US recession were high. However, the economic situation has improved in recent months. So, with inflation falling in the US and the interest rate hikes nearing an end, equities have performed better than anticipated and could continue finding support in that improving backdrop. We’ve sold some emerging market bonds and used the proceeds to buy more of the US equity markets.

We've also tweaked our bond investments to reflect global interest rate rises, focusing on where we see opportunities. Unlike the very resilient US, European economies have started to show some signs of a deteriorating economic outlook. Given the expected impact on inflation this divergence between the two regions could create, we've reduced our allocation to US government bonds and increased our holdings in European government bonds. Furthermore, we've increased our holdings in UK corporate bonds, which are attractively valued and could benefit from the ongoing drop in British inflation.

Although there have been numerous economic challenges, the US economy has continued to grow this year, performing better than many other wealthy nations. Out of the G7 countries the US has managed to record the strongest post-pandemic recovery, while also seeing inflation come down faster than other economies. The American labour market also shows surprising strength, with the unemployment rate remaining near record low levels.

The ongoing strength of the US economy also means the anticipated recession may materialise later than originally expected. The economy is holding up well thanks in large part to a spending spree by shoppers, whose pay packets have been boosted by strong jobs growth and rising wages. Despite the US Federal Reserve’s most aggressive rate-rising cycle in 40 years and still-high inflation, retail spending in July rose for the fourth month in a row, going up by 0.7%.

However, there are some signs consumers are having trouble keeping up with rising prices. US households have racked up more than $1 trillion in credit card debt and late payments are rising, which could spell problems for the economy further down the line.

The mood among investors has continued to lift this month as inflation falls in the US and UK and employment numbers remain resilient.

It’s a particularly good story in the all-important US, crucial to global investors, with annual inflation dropping to 3% in the 12 months to June from 9% at the same point last year. This has cheered investors as it suggests a pause in investment return-denting interest rate rises.

Markets now expect America’s central bank, the US Federal Reserve, to raise interest rates one more time, then stop – and potentially start cutting them next year. Meanwhile, US banks recently announced a relatively good set of financial results, and a much-anticipated US recession, while still quite possible, could now come later than expected.

The interest rate story is different in the UK, where analysts expect them to peak at just below 6% (they’re currently at 5%). But a larger than expected drop in inflation in the year to June further encouraged investors.

A respected measure of the market mood is the CBOE Volatility Index, or VIX, otherwise known as the ‘fear index’. It looks at potential, future volatility in the S&P 500 to measure how investors are feeling.

At the time of writing (21 July 2023) it was at 13.8, and a score of 20 or lower is seen as a sign of moderate volatility. In March 2020, when Covid was dominating the headlines, it peaked at above 80.

Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, said: “We’re currently in calm waters. Inflation is falling against a backdrop of still-resilient economic growth in the US. It’s coming down without much economic pain, with almost no jobs lost. The UK is a little behind in the process, but ultimately it should follow suit.

“We’re not there yet, we’ll need to see more proof points to be sure, but markets are certainly looking more positive than they did six months ago.”

The Coutts team is keeping this positivity in mind when considering its investment positioning. While they’re still adopting a conservative approach for now, they’re watching the mood shift closely.

“I would say we’re moving from a more conservative attitude to a more constructive one,” Lilian said. “Risks remain, but we’re monitoring developments continuously and stand ready to act as soon as opportunities arise.”

One example of this slight change in outlook is the bank’s view on a potential US recession, which has softened a little.

“Our US recession indicator is still quite high and it remains a risk, but we’re adjusting our expectations in light of recent data,” Lilian said. “We saw some weakness in the US housing sector and other interest rate-sensitive areas earlier this year, and this often signals a recession. But those sectors now seem to be stabilising and we haven’t seen any contagion elsewhere.”

He added: “The US economy is relatively strong and its people still have money to spend. So if a recession did happen, it would likely be later than first anticipated. And even if it happens, it’s so well anticipated by markets its impact could be smaller than in previous times.” 

There was a noticeable mood swing in markets for June as positive news just kept on coming out of the US. The mood among shoppers rose, while inflation continued to ease. And despite the backdrop of climbing prices and rising interest rates, Americans continued to flaunt their cash as retail sales unexpectedly jumped in April.

The US economy looks to be holding up rather well, with its job market defying predictions of a slowdown by adding 339,000 new jobs in May. But more importantly, the US Federal Reserve – America’s central bank – paused its rate hiking cycle for the first time since March 2022. It’s now waiting to see what impact the current high rates will have on inflation and the wider economy.

But while the US takes a break from raising interest rates, the UK is still trying to tame rising prices. Core inflation – which strips out fast-changing fuel and food prices – is still on the up in the UK. The Bank of England (BoE) is now feeling the pressure to take back control, and markets now believe that interest rates could go as high as 6%.

On the back of these expectations, UK government bonds suffered as yields soared to their highest levels since the global financial crisis in 2008 (as yields rise, prices fall).

Overall, unless the current trend of stubbornly high inflation drastically changes, the outlook for the UK remains challenging. 

The US is defying the odds because elevated inflation and soaring interest rates have had minimal impact on businesses and the public so far this year. The typical American has seen their wages steadily grow and is still spending as a result. The US labour market as a whole is showing resilience as businesses keep profits high, meaning staff have managed to keep their jobs.

But we’re not writing off a US recession just yet. We’re yet to see the full impact the rapid rise of interest rates has had on the economy. The US manufacturing sector is showing signs of slowing as a drop in sales growth, combined with rising labour costs, starts to take its toll.

For now, though, from an investor perspective, all eyes are on falling inflation and the possibility of a ‘soft landing’ for America’s economy – an uneventful slowdown.

On the other side of the coin is the UK. We’ve managed to avoid a recession, rescued by a rebound in people’s spending that sparked some economic growth. But inflation remains public enemy number one. With the unemployment rate at a near all-time-low and wage growth picking up momentum, prices are still rising despite the BoE’s rate hiking efforts.

Elsewhere, economic momentum is starting to slow across Europe. China is facing a slowdown that’s having a domino effect on Germany – Europe’s biggest economy – and the rest of the continent. 

Artificial intelligence (AI) is causing a stir on Wall Street. Leading US stock markets are steadily higher over the last couple of months, driven mostly by a select few technology giants that are at the centre of the AI revolution. Since ChatGPT burst onto the scene, companies that can leverage on the technology are looking to keep up with the pace, with around 70% of firms expected to be using AI by 2030, according to McKinsey.

As a result, double digit percentage gains in technology stocks contrast with their negative performance last year. Questions are now being asked around whether or not the rally is sustainable. The experts at Coutts, the bank behind Royal Bank Invest, embrace the potential for technological disruption but are cautious about chasing the market higher.

Howard Sparks, US Equity Research Analyst at Coutts, says: “The rapid rise of AI has created a frenzy on Wall Street with investors piling into shares of big tech companies that are leading the field. However, it’s not very healthy that such a small number of stocks are driving the market as this isn’t customarily a signal of a sustainable rally.”

Even though the US market is performing well so far this year, economic data still suggests that a US recession is on the cards over the next year, even though the labour market remains strong and wage growth is healthy. Inflation is falling but is still above the US Federal Reserve’s target. With all this in mind, Coutts maintains conservative positioning in its investment portfolios.

This side of the Atlantic, inflation is more stubborn. Although rising prices are starting to ease, UK core inflation (which strips out volatile energy and food costs), has reached a 30-year high of 6.8% year-on-year. This is a key figure that the Bank of England takes into consideration when deciding on interest rate moves, and so further interest rate hikes are expected in the coming months.

With further interest rate rises on the cards, UK bond yields have gone up (which means prices have come down). Our UK government bond exposure remains low as they only account for 1.7% in our balanced funds. 

The US government is close to running out of money. In January, the government reached its limit of $31.4 trillion and has been battling with the divided Congress to raise the debt ceiling, which is the amount that the government can borrow.

This isn’t the first time this has happened though. According to the US Treasury, since 1960, the US government has raised or altered the debt ceiling 78 times. In 1995 and 1996, clashes over federal spending between the Republican-controlled Congress and President Bill Clinton resulted in the government being partially shut down twice for a total of 26 days, which didn’t trigger a default on US debt. There was also a stalemate between President Barack Obama and the Republicans in Congress in 2011, but an agreement was reached to raise the debt ceiling in the final days.

Negotiators from the Democratic and Republican parties reached an agreement at the end of May, which received the green light from the US House of Representatives shortly after. Historically, debt ceiling standoffs have ultimately been resolved, given the economic and financial market ramifications that can follow debt default events. 

Welcome to the big battle of the bulls and bears!

We’re seeing mixed signals at the moment. Stock markets have recovered from a mid-March slump, which is raising investors’ confidence. But most major signals show a recession knocking on America’s door that could impact markets worldwide.

So an ongoing battle between what investors call “the bulls and bears” – the optimists and pessimists – continues. Some think things are looking up, others see clouds on the horizon.

Because of this uncertainty, the experts at Coutts behind the Royal Bank Invest funds are playing it safe for now.

Lilian Chovin, Head of Asset Allocation at the private bank, said: “We’re led by data and analysis, not hunches. While the stock market rally is creating renewed optimism among some investors, deteriorating macroeconomic conditions, falling house prices and tighter bank lending remain reasons to be cautious and patient in our view.”

This ‘wait and see’ approach is reflected in Coutts’ investment positioning at the moment.

Overall, the team is defensively positioned on stocks and has a high allocation to government bonds, which are relatively more secure and provide useful diversification.

In fact, Coutts has progressively bought more government bonds as a US recession became more likely. And there is even more prudent positioning within that. They bought more US government bonds given higher yields, and sold Japanese government bonds due to some specific interest rate uncertainty in that region.

In April, they slightly reduced their exposure to high yield corporate bonds, which come with more risk, and bought more higher quality investment grade bonds, which could benefit as inflation and interest rates start to settle. 

For some time now, market performance has been dogged by rising interest rates and ever-higher inflation, both of which can be bad for stocks and bonds. But at the start of May we saw signs this could change – in the US at least.

The US Federal Reserve (Fed), America’s interest rate-setting central bank, raised rates by another 0.25%, but suggested that could be the last hike for the time being. Their actions and comments matter because what happens in the world’s biggest economy impacts investors across the globe.

“The overall aim of raising interest rates is to bring rising inflation under control, and we think headline inflation will keep dropping at least until the summer,” says Lilian. “So the Fed announcing a pause in raising rates isn’t a surprise.

“The central bank has effectively suggested interest rates may have reached their peak, which could mark an important turning point for markets. But we’ll need to wait to see what happens next.”

He adds, “Markets expect significant rate cuts into next year as the current, high rates take their toll on the US regional banking sector, which could damage the economy further while a recession looms. But while that’s quite possible, it’s by no means certain.

“As always, we’ll continue to monitor and analyse the data and position our customers’ investments accordingly, based on what the facts tell us about upcoming market conditions.”

March was an eventful month for the financial sector as banks in both the US and Europe came under pressure. In the US, we saw the collapse of Silicon Valley Bank (SVB) as rising interest rates impacted its lack of diversification and uncommon business model. And across the Atlantic, it was Credit Suisse’ long standing issues that led to it being bought by rival bank UBS.

These events were very specific to the banks concerned rather than part of any wider, systemic issue. Investors’ nerves were soon settled by how quickly and effectively the authorities were able to step in and help ease the stress. The US Federal Reserve (Fed) provided emergency funding to the wider banking sector while Swiss regulators worked overtime to get the Credit Suisse-UBS deal finalised on short notice.  

In the all-important US, there was uncertainty around what the Fed might do ahead of its rate announcement in March following what happened to SVB. Investors and economists were divided on whether the central bank would cut, stick or raise rates further. In the end, it announced another 0.25% hike, but comments from Chairman Jerome Powell suggested the peak could be near. Likewise in the UK, the BoE also raised rates by 0.25%, in line with expectations.

The Fed said it took the recent situation in the banking sector into consideration when making its decision to raise interest rates, which suggested rates could near their peak sooner than expected. The language used around any further rate rises was softer as the central bank acknowledged the stress any further limits on bank lending could mean for the economy. However, Jerome Powell wouldn’t comment on when rate cuts might begin. 

Despite the pressure that elevated rates are having on markets and economies, central banks across the globe have said that bringing down inflation remains the top priority. In the US, year-on-year inflation fell to 6%, down from 6.4% the month before. This still remains above the Fed’s target of 2%. For the UK, however, inflation is proving a little sticky having picked up some pace again after falling over the previous three months.

Our funds and portfolios remain cautiously positioned. We became more defensive ahead of March’s events as our outlook for 2023 predicted a recession, which we believe could still be on the cards for the US. 

Markets built on January’s positive start, but with some small but important differences.

Rising prices remained at the forefront of investors’ minds as the latest round of inflation numbers showed not all costs were easing as quickly as initially hoped. In the US, there was a slight slowing in the rate at which prices increased, but there were some elements (including shelter costs) which proved to be stickier. As a result, markets are expecting interest rates may need to stay higher for longer.

It’s a year since Russia’s invasion of Ukraine, but there are still no signs of an end to the conflict. At the same time, the shooting down of China’s spy balloon by the US added to the growing tension between the two superpowers. All of this added to an increased focus on geopolitics in February.

Expectations of interest rates staying higher for longer along with rising geopolitical concerns led to a slight weakening in bonds (as bond prices go down, yields go up) and a return to a slightly stronger US dollar. And at the time of writing, stocks from the technology sector are slightly up for the month, outperforming the market and last year’s winners like energy.

In Japan, Kazuo Ueda has been nominated as a potential new governor of the Bank of Japan. If he gets the job, many analysts think he may do away with long-standing, tight controls the bank has to help make it attractive for people and companies to borrow. The idea being that this in turn encourages people to spend more, stimulating the economy but also causing more inflation. While low inflation or even deflation has been a longstanding problem in Japan, recent elevated numbers suggest it could be time for the Bank of Japan to turn less accommodative. Such a change could cause much uncertainty for global markets and dent the performance of Japanese Government Bonds.

But the experts at Coutts who run the Royal Bank Invest funds had already reduced their investment in Japanese Government bonds in January, seeing some uncertainty ahead. 

While some of us may have suffered the January blues, markets started off the year on a positive note having finished the month with strong performances across the board.

Key drivers for this upbeat start include Europe’s mild winter – which brought down projections for future energy prices – and China reopening its economy. More optimism from central banks that inflation could continue to slow down in Europe and the US also helped bonds and equities finish January positively – although risks of recessions remain.

Rising inflation seems to be behind us now. And although it’s still quite high, investors believe central banks won’t raise interest rates as much as last year to try to tame it. That’s potentially good because rapidly rising rates tend to be bad for markets.

But despite the positive start, the all-important US could still have a challenging year ahead with 2022’s interest rate rises taking their toll on its economy. It’s becoming difficult for people to borrow, which is causing a dip in retail sales. This, along with a weakening housing market, could cause its economy to slow down later this year.

Markets are in a transition phase right now, as Lilian Chovin, Head of Asset Allocation at Coutts (the bank behind the Royal Bank Invest funds), explains.

“On one hand, inflation pressures have eased, but it’s too early for central banks to start cutting interest rates,” he says. “On the other, China is opening up while the US economy continues to slow down and could move toward a recession.

“With this uncertain landscape front of mind, we’re managing our portfolios and funds cautiously.”

Across transport, NHS and other industry walkouts, the UK witnessed 25 days of strikes in December, and 20 days in January. This brought the total number of strike days in 2022 to a 30-year high, according to the Office for National Statistics.

While the reasons behind the strikes vary from sector to sector, one common factor is the cost of living crisis, with inflation on goods and services not being matched by increases in people’s wages. With a very low unemployment rate and a shortfall in available staff, workers are in a strong position to negotiate pay raises.

So what’s the impact of all this? Well, for the Royal Mail, its recent staff strikes cost the company £200 million. For the wider economy, it’s not quite so easy to calculate.

While the strikes are impacting the day-to-day lives of most people, their spending is unlikely to dwindle – they’ll just spend their cash in different places. For example, instead of buying their coffees or lunches at stores close to their offices, they’ll likely just buy them closer to home.

Overall, looking at recent examples in other countries, industrial actions have generally had a limited impact on economies. So we don’t expect recent strikes to be a key driver of the UK economy in 2023. 

Although it’s been the talking point of the year, it looks like inflation across the world has finally reached its ceiling. Annual inflation numbers have started to fall but remain at multi-decade highs. The rising cost of goods in the US has been slowing since July, but the UK and the rest of Europe only saw a deceleration in November.

Central banks have had an ongoing battle trying to tame climbing inflation by raising interest rates. While this appears to have worked, we believe central banks will remain cautious and won’t reverse their rate hikes quickly. We think interest rates will peak in 2023, but it’s unlikely to happen until later this year.

As fears of a recession began to creep in towards the end of 2022, both stocks and bonds fell in December – a pattern seen throughout the year.

Following the round of interest rate hikes from central banks in November, markets turned their focus to the likelihood of a recession across Europe and the US. With what we know already, it’s likely that the UK and Europe have already fallen into recession. We’re just waiting for confirmation from the official statistics. For the US, it doesn’t look like they’re in a recession yet, although it’s possible its economy will contract in 2023. 

Having been in and out of lockdown throughout much of 2022, China began relaxing its Covid measures in November. While this was initially welcome news for investors, a rapid rise of cases has caused further chaos, with hospitals reportedly overwhelmed.

Despite positive developments in China, with a renewed focus on economic growth, we continue to see some specific risks linked with the lack of political transparency. As a result, we remain somewhat cautious on some parts of the Chinese market, but like broader emerging market stocks. Of course, what happens in China has a big effect on general emerging market exposure, so we’re keeping an eye on developments there.