We saw the nervous investment environment that characterized 2023’s third quarter continue for most of October—sharply higher US Treasury yields and weaker stock markets. This was driven by surprisingly strong economic activity in the United States, which prompted fears that this would prolong the US Federal Reserve’s (Fed’s) period of restrictive monetary policy, or even call into question the ongoing process of disinflation, as discussed in Allocation Views last month. However, with increased confidence that global growth is showing signs of stabilisation, we have taken advantage of this period of asset market weakness to eliminate our moderately cautious view of equities and return to a truly neutral allocation stance overall at the cross-asset level.
When we look at the progression of a range of leading economic indicators that we monitor, developments globally are not universally upbeat, but given the relative importance of the United States in broader measures, they point toward a period of stabilisation at least. Notably weaker prospects in the Eurozone reflect the greater burden that higher interest rates place on consumers and companies in this region, and its greater dependence on international trade and manufacturing. Reflecting this, we continue to hold a more cautious position on stocks in this region, finding more appealing prospects in the emerging markets outside of China.
China still faces a challenge due to weakness in the local property market and an unwillingness of policymakers to stimulate the broad economy due to high levels of debt. Recent changes to public financing arrangements may show some progress, but we see this policy dilemma as likely to persist and act as a drag on global growth. We continue to express our general emerging market preference while not favouring China’s stocks.
In summary, we see recession risks moderating for the developed economies, led by the United States, but still anticipate a period of below-trend growth to continue. Risks related to the lagged effects of monetary policy and tight bank lending standards temper our optimism. The ongoing resilience of consumer demand—as well as the service sector of the economy more broadly relative to manufacturing (which has been weak)—is expected to wane. Financial markets’ corporate earnings expectations remain exposed to ongoing margin pressures, especially where real wage growth continues to feed through. However, our growth theme continues to show “Growth Is Stabilizing” even as recession risks remain somewhat elevated globally.
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