Monthly House Views - Waiting for the pause - July 2023

Economic activity data has slightly disappointed, without calling into question our scenario of moderate growth this year. Recent data show a slightly less positive trend in economic activity in the United States, the Euro area, and also in China, whose post-Covid recovery remains modest. Only the United Kingdom is outperforming expectations. That said, the figures remain broadly consistent with our scenario of continued modest growth. Developed economies will continue to be underpinned by healthy labour markets and still plentiful household and corporate savings, which will continue to mitigate the impacts of inflation and monetary clampdown. 

Markets are now pricing in a pause by central banks. Inflation has continued to come down rapidly, in line with producer prices, but underlying inflation is proving more stubborn against a backdrop of still-solid labour markets. Central bank policy tightening now seems to be nearing its end. Banks look ready to pause but will keep policy rates high until they see clear evidence underlying inflation is easing.

Balancing equities and fixed income to play the favourable momentum of equity markets. Our highly diverse global positioning has let us play the rally in equities since the start of the year, while retaining some protection against any fresh turbulence. Within our equity exposure, we still like European stocks, which are still riding a stronger earnings trend and trading on cheaper multiples. We also retain our Overweight to US sovereign and top-rated corporate debt because of the attractive returns being paid on both these asset classes.

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