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To tackle the rising cost of living, interest rates have reached multi-decade highs. They could now be approaching their peak, but the fast pace at which they climbed continues to take its toll on economies, particularly the all-important US.
In fact, the US is likely to face a number of challenges this year, such as falling company profits, people finding it hard to pay their credit card bills, and even a recession.
We said in our Investment Outlook at the start of the year that we believed the chance of a US recession would be a main talking point this year. We still do. Our own recession indicator is reaching high levels, and when that’s happened in the past, a US recession hasn’t been far away.
Factors behind this include a drop in building permits and a weak outlook for consumer spending and manufacturing in America. Something we’re keeping a particularly close eye on is the US unemployment rate though. It remains pretty low at the time of writing, but if it rises, that could seal the deal of a recession.
There is a chance we’ll see a significant delay to a recession starting, or even a recovery without one, if the US labour market stays strong. With an eye on the upcoming presidential election next year, the US government may well want to protect the economy and contain job losses.
However, while this can’t be ruled out, the reality is it would be very difficult to engineer while still keeping inflation under control, which remains a declared aim of central banks and governments.
Along with the rising cost of living, high interest rates mean people are really feeling the squeeze. That impacts people’s spending, which can hit company performance and hurt investment returns.
Again, in the US, which is very focused on consumer spending, a lot of people have had to dip into their savings or take on more debt – which isn’t cheap anymore. The real cause for concern is when more people are missing payments on their credit cards or car loans. The only saving grace right now is the unemployment rate being so low – at least plenty of people still have a salary.
It's not only individuals that are suffering from rising costs. Companies have also felt the pressure. Coming into 2023, analysts expected companies to perform less well than they did last year, and they have. But thankfully, they haven’t been hit as hard as first expected. When it comes to company earnings, it’ll likely be revealed as a difficult first half of the year, but this could all turn around by the end of 2023.
Despite some ups and downs so far this year, overall our funds and portfolios have performed reasonably well. The fact that companies earnings have performed better than expected, albeit beating low expectations, benefitted our investments.
As for bonds, now that investors believe we’re closing in on the peak of interest rates, their prices have been rising too (meaning yields have fallen). This has also supported our overall performance.
But with a lot of uncertainty on where things could go for the rest of the year, we think it’s best to move forward with caution. We therefore remain conservatively positioned within our investments.
Our cautious positioning on stocks includes holding healthcare. We continue to see this as an attractive sector, one that tends to perform well during times of high interest rates and recession.
Elsewhere, we also recently increased our investment in emerging market companies, as the region is on cheap valuations and showing signs of stabilising after China’s economy re-opening.
As we see the potential end of rising interest rates, at least for now, we’ve adjusted our fixed income exposure by adding to government bonds, especially those from the US where an interest rate peak is likely to come sooner than the rest of the world.
But while US government bonds look more appealing at the moment, US financial credit, a riskier bond, is likely to be more sensitive to a recession, so we’ve steered away from that.
We continue to progress on our journey toward 2050 net zero carbon emissions. Currently, average portfolio alignment against this ambition is 58% across our core investment propositions. This is ahead of our 2025 goal, and well on track to our 2030 target.
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We regularly update our articles depending on what’s happening in the market so check back for future updates.
