It’s not all doom and gloom in the markets

At the start of this year, there was a common view amongst economists and investors - with the big spike in inflation, many expected a recession was inevitable in the first six months of 2023. But the gloomy narrative has so far been wrong. We haven’t seen a global recession. Some markets have fared better than expected, and last month, the International Monetary Fund (IMF) revised its 2023 GDP forecasts¹ upwards for all regions and no longer believes a UK recession is likely.

In 2022, we saw both equities (shares in a company) and bonds² fall - unusual by anyone’s measure. Even more uncommon, bonds fell more than equities. This made people worry about events that could cause investments to move by more than what’s ‘normally’ expected. 

So why haven’t we seen a recession?

Mainly it’s because consumption has remained steady. The expectation is that with higher rates, households experience higher mortgage payments and less spending power. Businesses should also find it more difficult to borrow money. However, today’s economy is not as sensitive to interest rates as this theory suggests. Over recent years, households and corporates have been borrowing at fixed rates rather than adjustable, and the lengths of borrowing terms have increased, meaning there’s little need to borrow at higher rates yet. 

Another reason is employment. A shortage of workers in the US and the UK particularly has helped to prevent unemployment from rising. Without rising unemployment, the economy shouldn’t fall into a deep recession. 

Time for optimism?

There’s still a view that inflation is too high, and we need a ‘proper’ recession to bring it down further. Yes, inflation is coming down. If you remove the drop in energy and food costs, core inflation is still too high, but it’s heading in the right direction. Economic growth is respectable in the US and a deep recession doesn’t seem likely in the UK and Europe, where consumers are spending and unemployment is low. 

Investors have also favoured defensive stocks, like food and energy, which are less sensitive to economic downturns, and they’ve bought into stocks related to the Artificial Intelligence theme. Tech stocks, perceived to be defensive in a recession, are no longer cheap, and certainly aren’t pricing a gloomy outlook.

Where do we see opportunities?

We believe the difference in performance across regions and stocks has created opportunities. We think markets like mid and smaller companies in the US, as well as Europe and Emerging Market stocks, can catch up, as the global economic expansion continues. For the first time in a while, investors are being paid for their patience and many continue to hold a positive view and expect returns on stocks and bonds to continue to outperform cash over the longer term.

The value of your investment can go down as well as up so you might not get back the amount you put in. The views expressed here should not be taken as a recommendation, advice or forecast. We’re unable to give financial advice. If you are unsure about the suitability of your investment, speak to a financial adviser.

¹World Economic Outlook Update, July 2023: Near-Term Resilience, Persistent Challenges (imf.org)
²A loan in the form of a security, usually issued by a government or company.