Monthly House Views - Walking on a tightrope between risks - November 2023

Geopolitical risks on the rise with markets already jittery. The impact of the Israel-Hamas war on global markets should remain modest as long as the conflict doesn’t escalate to other countries. But it is testing the nerves of markets that have been in troubled water for weeks. The United States economy remains robust while persistent concerns on inflation risks could revive upward pressure on interest rates. Such diverse risks, from geopolitical tensions to rate pressures, further blur the economic outlook.

We stand by our central scenario of a slowdown in economic activity. Risks to our scenario are stacking up. We still expect developed economies to slow over the next few quarters as fiscal policies are normalised and the lagged effects of monetary policy feed through. But the adjustment will be mitigated by stubbornly strong labour markets and the easing of inflation which will restore household purchasing power. The United States economy should continue to hold up better than the euro zone and the United Kingdom. This suggests the major central banks have probably reached their interest rate plateau but will likely await clearer signs on a steady downward path on core inflation before easing their monetary policy.

Strategic balance between equity and bonds, reducing our Overweight to the US bond markets. 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. Amid continuing upward pressure on the long end of the US curve, we have reduced overweight exposure to US sovereign bonds to neutral and moved to a dollar Overweight. We still prefer United States equity markets on the back of better economic prospects.

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