Monthly House Views - Rates nearing their peak - August 2023

Inflation is clearly on the slide. The shocks that triggered the global price surge have recently receded and headline inflation is now falling fast.  Ripples could persist in the economy for some time yet, but the real hard pressure looks to be behind us. With central banks now nearing the end of their tightening cycle, interest rates are probably nearing their peak. That said, banks are likely to stick at current levels until they can be sure the underlying inflation dynamics are fading.

Economy a bit less dynamic, particularly in Europe. Latest figures show a somewhat slacker trend in the economy, particularly in the euro area, United Kingdom and also in China whose recovery remains unimpressive. These data broadly match our scenario of continuing but modest growth. Developed economies can count on sturdy jobs markets and solid balance sheets for businesses and households, which should continue to mitigate the hit from inflation and tighter monetary policy.

Balancing equities and bonds, while boosting duration. We are standing by our highly diverse global positioning, which has allowed us to catch the rally in equities since the start of the year, while retaining some protection against any fresh turbulence. In fixed income, we are now preferring longer maturities in euro area and UK sovereign bonds. We also retain our Overweight to US sovereign and top-rated corporate debt because of the attractive real returns being paid on both these asset classes. Within our equity exposure, we still like European stocks, which are still riding a stronger earnings trend and trading on cheaper multiples.

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