Equity strategy and market outlook – August 2023

Alastair George believes that for all the tough talk on inflation by central banks, global economic growth is on a declining trend and policy interest rates are likely to be close to their peak in the US and Europe. For example, while the ECB’s current focus may be on above-target inflation, the eurozone will shortly face the consequences of a deceleration in the money supply not seen since 2008. We believe long-term government bonds remain attractive at current yields. Slowing growth and falling rates are likely to benefit more defensive segments of the equity market. Economically sensitive sectors are likely to come under pressure if global growth slows as survey data indicates. We also note that China’s economy is struggling to deliver the expected post-COVID rebound. Given that the most recent global sector performance favoured cyclical and technology stocks, a meaningful sector rotation could be underway during H223. Producer price indices remain subdued, indicating that headline inflation is likely to continue to fall back to central bank targets over coming quarters. While wages and employment remain strong in Europe, both monetary data and purchasing managers’ survey responses are consistent with a slowdown. US equity valuations are abnormally high and this may be tested in the event of a weakening trend in incoming data. A key driver for the US has been the relentless enthusiasm for AI-related investments, but the productivity gains from this technology remain years into the future and the current investment rather than profit-led focus is inherently risky. European markets are trading close to fair value, reflecting weaker growth prospects and the relative absence of global technology leaders. We maintain a neutral outlook on global equities and anticipate a rotation in sector performance as economic growth slows in the coming quarters. We continue to believe long-term government bonds are attractive with the peak in policy rates also clearly in sight.

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