Financial Markets Quarterly Report Q3 2023

What’s the outlook for inflation and interest rates?

As we come into the third quarter of 2023, we are seeing inflation slowing in some regions, such as the United States and in Europe, though it’s proving more stubborn in the UK, where core inflation is increasing. This is partly due to wages, which have been moving higher and tight labour markets, as well as highly rising prices in some industries, such as air travel.

Markets are currently expecting interest rates to be nearing their peak and are expecting some interest rate cuts within the next one to two years, depending on the region.

Will cash provide a better return than financial markets?

Higher interest rates mean that savers should be rewarded, though there is always a lag for savers compared to loan products for consumers. When compared to cash rates, stock markets have historically provided far superior returns over most long periods. Trying to time when to hold cash and when to be invested is very difficult because markets can change direction very quickly.

Given that bond prices have fallen by some margin this year, the yields available are now far more appealing. Equities too have repriced, so given the starting point, we think a balanced portfolio should do well from here on, though of course this is not guaranteed.

Are we going into a recession?

A global recession does not look imminent, particularly with strong consumer spending and a robust labour market in the United States. However, some cracks are starting to appear. The Eurozone is in a small technical recession, and UK GDP is only in a slight positive territory. Interest rate policy is a fairly blunt tool, which makes life increasingly more expensive for consumers and companies alike.

As a result, there may be further corporate casualties to come, especially for the more indebted parts of the market.

Looking ahead, what does this mean for markets and the portfolios?

We believe the end of the monetary tightening phase is approaching, and therefore the majority of the valuation adjustment has already been seen in the bond markets, as demonstrated by the higher yields on offer. Therefore, where appropriate, we have increased interest rate sensitivity in the portfolios to capitalize on this.

Equity valuations have also improved, and we are neutrally positioned on the asset class. We have recently increased active management in the UK equities where we can, as it’s an area that has struggled as of late. We continue to emphasize quality characteristics such as low levels of debt in the equity holdings and avoid areas of the market with high debt such as commercial property.

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Park Hall Financial Services Limited is authorised and regulated by the Financial Conduct Authority.

The information within this article is for information purposes only and does not constitute investment advice. They represent the opinions of the fund manager and those of Square Mile. It does not contain all of the information which as an investor may require in order to make an investment decision. Any reference to shares/investments is not a recommendation to buy or sell. If you are unsure, you should seek professional independent financial advice.

Past performance is not a guide to future performance. The value of any investment and any income from it is not guaranteed and can fluctuate depending on investment performance and other factors. you could get back less than you invested.

Some investments, e.g. property, may be difficult to sell and will be subject to market conditions at that time. Their value is the opinion of an independent valuer.

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