Webinar: Market update and economic outlook (Q3 2023)

Sterling’s recent rally may be a red herring for those looking for signs of strength in the British economy, according to Cazenove Capital’s investment team in a recent market update.

The UK is currently “winning the world cup of inflation” and interest rates will probably have to go higher and further than in the rest of the world. This is likely to cause the UK to enter a mild recession later in the year before the outlook starts to improve, explained Caspar Rock, Chief Investment Officer. Longer-term strength in the pound will depend on more fundamental improvement in the UK economy.

Sheltering client portfolios

With an economic slowdown looming, there is a stronger case for cash and fixed income in client portfolios. We have been increasing exposure to both.

Over the longer term, however, we remain confident in equities’ ability to deliver returns ahead of inflation. Historical market data shows that over one-month to three-year time horizons, multi-asset portfolios have outperformed inflation about 60% of the time. However, that figure climbs to around 90% for ten-year periods. This is why it’s important to look at the longer-term horizon when seeking returns above inflation.

China’s recovery from Covid

China’s economic reopening has been somewhat disappointing. This partly reflects the very different way in which China and the West implemented Covid stimulus measures. Western governments had a much greater focus on supporting consumers, leading to a powerful surge of demand when consumers were able to spend again. In China, consumer spending has remained somewhat constrained as a result of uncertainty in the property market and a weaker social safety net. We may well see further stimulus measures from the Chinese government in the near future.

Which sectors are showing promise?

Tech stocks have been skyrocketing in recent months, but only nine months ago values were crumbling. Ahmet Feridun, Deputy Chief Investment Officer, argues that this volatility is to be expected given the huge changes underway in the industry. “There have been reports looking at the impact of AI on productivity in different sectors, offering up astonishing numbers. However, there is still a lot to figure out, from privacy to copyright. Regulations will come in which will have an impact too,” he says.

There are also attractive opportunities in certain parts of the UK investment trust market – notably infrastructure and commercial property. There are some “really exciting opportunities” for those willing to be patient, Caspar argues.