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A month of two halves

Published: September 2023

Unfortunately, August was a tough time for equities. Global stockmarkets lost ground at the beginning of the month as confidence dropped due to rising bond yields and concerns about the slowing Chinese economy. However, despite that initial volatility, the market’s mood then lifted as the month went on, boosted by some strong earnings reports.

China’s post-pandemic recovery has failed to fully materialise following declining global orders for exports and sluggish domestic demand. The Chinese property crisis is also worsening, with two major developers facing severe financial difficulties. Furthermore, the world’s second-largest economy is grappling with deflation, stoking fears of Japanese-style stagnation. Chinese youth unemployment has reached an all-time high, exceeding 20%.

China’s central bank has cut key interest rates for the second time in three months in a bid to revive the economy, but most analysts agree it will have little impact. Any downturn in China is likely to weigh on Germany’s economy, which is heavily dependent on China for trade. Germany is Europe’s biggest economy and there are fears that a slowdown in China could ripple out and affect the wider euro area, which is still recovering from last year’s energy shock.

Sven Balzer, Head of Investment Strategy at Coutts, says: “Markets rebounded after some volatility, though concerns linger about slowing growth and property woes in China. Its economy was meant to drive global growth his year, so the dramatic slowdown is sending alarm bells out around the world.”

What does this mean for your investments?

The global economic outlook is still brighter than it was at the beginning of the year. Inflation is coming down in most developed economies, interest rates look like they are now peaking, and growth remains resilient in the US. While we're still cautious overall, we've recently increased our investment in equities across our portfolios and funds, moving towards a more neutral position when compared to our benchmark).

At the beginning of the year, concerns about a potential US recession were high. However, the economic situation has improved in recent months. So, with inflation falling in the US and the interest rate hikes nearing an end, equities have performed better than anticipated and could continue finding support in that improving backdrop. We’ve sold some emerging market bonds and used the proceeds to buy more of the US equity markets.

We've also tweaked our bond investments to reflect global interest rate rises, focusing on where we see opportunities. Unlike the very resilient US, European economies have started to show some signs of a deteriorating economic outlook. Given the expected impact on inflation this divergence between the two regions could create, we've reduced our allocation to US government bonds and increased our holdings in European government bonds. Furthermore, we've increased our holdings in UK corporate bonds, which are attractively valued and could benefit from the ongoing drop in British inflation.

Shoppers keep the US economic engine humming

Although there have been numerous economic challenges, the US economy has continued to grow this year, performing better than many other wealthy nations. Out of the G7 countries the US has managed to record the strongest post-pandemic recovery, while also seeing inflation come down faster than other economies. The American labour market also shows surprising strength, with the unemployment rate remaining near record low levels.

The ongoing strength of the US economy also means the anticipated recession may materialise later than originally expected. The economy is holding up well thanks in large part to a spending spree by shoppers, whose pay packets have been boosted by strong jobs growth and rising wages. Despite the US Federal Reserve’s most aggressive rate-rising cycle in 40 years and still-high inflation, retail spending in July rose for the fourth month in a row, going up by 0.7%.

However, there are some signs consumers are having trouble keeping up with rising prices. US households have racked up more than $1 trillion in credit card debt and late payments are rising, which could spell problems for the economy further down the line.

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