The world seems an unpredictable place at the moment with war, inflation, central bank interest rate questions and geopolitics all making it difficult to know how to invest.
Yet through the uncertainty there are some aspects of markets that people tend to agree on. Below the Trustnet team combines what it has been hearing from fund managers and industry professionals to give a base-case scenario, based on views that we have heard multiple times. This is by no means an exhaustive list – or an attempt to predict the future.
The UK
Starting with the home market, we believe most expect inflation to stay higher for longer, although it has been coming down. The latest September figures show UK inflation remained at 6.7%, and it is likely to remain elevated for some time above the 2% Bank of England target. The next print is due out tomorrow.
However, the path of the Bank of England is unclear. While it maintained rates at 5.25% at its latest meeting last week, the views on whether it will raise once more, hold pat, or even cut rates are up in the air.
If we had to choose, an elongated pause is perhaps the most likely, but there is no clear consensus on the matter. After its last meeting, however, a further rate hike seems the least likely option at present.
For the economy, discussions with fund managers suggest they expect a recession next year, but there is also chatter that one could be avoided. Indeed, the International Monetary Fund last month upped its forecast growth for 2023 from -0.6% to positive growth of 0.5%. The economic picture for the UK is as murky as that for its central bank.
In the world of politics, Labour is expected to win the next general election, with markets seemingly pricing this in. An election is to be called some time next year.
Turning to stocks, the FTSE 100 remains cheap despite outperforming other regions in recent years – particularly against its US counterparts. Mid- and small-caps are even cheaper, but have not undergone the rebound of their larger cousins.
Investors are using the market for income, with little expectation for capital growth, given its composition. There are few tech names, with the top end of the market dominated by banks, oil majors, miners and healthcare companies. Most suggest this could be a good buying opportunity, although it is far from a guarantee.
The US
Across the pond, experts we have spoken to in recent months seem more confident that the US can avoid a recession than the UK, although most remain wary.
Inflation was higher than expected in September at 3.7% but is some way lower than the UK, which leads many to believe the Federal Reserve has now ended its interest rate hiking cycle. Last week the Fed did indeed pause again for the second meeting in a row, although rhetoric remained relatively hawkish.
The election next year could be where the US market comes under most pressure, with a Donald Trump versus Joe Biden campaign the most likely outcome at present. Neither are viewed as perfect options, but the reaction from markets should be muted. An expected crash when Trump won the election in 2016 never materialised, suggesting investors care little about the political landscape.
On the US market, most agree that it is expensive – particularly relative to other regions – but suggest this is for a reason. The S&P 500 has been boosted by the rise of artificial intelligence (AI), which has helped the ‘Magnificent Seven’ stocks soar this year and some argue that valuations do not matter when buying these perennially growing names. Others are less certain that this can continue, and any re-rating in the tech giants would be a big headwind to the market.
Europe
Turning to Europe and most agree this will be the first region expected to enter recession in the coming quarters. Inflation of around 5% is in-line with the UK but the European Central Bank has been behind the curve in raising rates, which currently stand at between 3.75% and 4% – the highest level since the euro was launched.
There are whispers that the European Central Bank could be the first to cut rates – and the most in dire need to do so – should Europe enter recession.
On the politics front, there are no major elections upcoming next year that should concern investors at present, but the war in Ukraine must be monitored closely.
The market meanwhile is viewed as an ‘old economy’ basket of stocks dominated by consumer staples and healthcare, although it does have more tech than the UK.
Many have pointed out the correlation to China, with Europe a main exporter to the nation. This could be an issue should Chinese consumers focus more on domestic products, as has been a trend in recent years.
Asia and the emerging markets
Starting with the area’s largest player, China is cheap but there are myriad issues surrounding the property sector, its unspectacular recovery following the end of lockdowns and fears of government intervention on tech companies. There are also concerns that China could take heed from Russia’s invasion of Ukraine and turn its sights on Taiwan.
On the economic front, slowing GDP and an era of deflation could cause problems for investors, although the rising Chinese middle class suggests there remain long-term themes worth playing for those that can get it right.
India has been the better performing country so far this year – and indeed over the past two decades. It remains a favourite among fund managers, although they are concerned that valuations could be too high.
The general election next year could also cast some doubt and will be worth keeping an eye on for investors with allocations to the region.
Elsewhere, Latin America funds have had a boon in recent years as commodity prices have rocketed, although this seems to be the main selling point for the region and performance is heavily linked to prices.
Japan
After decades of promise, the Japanese market has finally gone through something of a swansong, with the promised reforms made almost a decade ago under former prime minister Shinzo Abe finally bearing fruit.
The country has escaped deflation – albeit barely – and interest rates remain rooted to the floor, but corporate governance is improving, with businesses returning more cash to shareholders.
Japan is well-known for its cutting-edge technology, its big industrial names and its consumer stocks and many managers have moved into the region recently, including the likes of renowned US investor Warren Buffett.
Bonds
Fixed income is relevant for the first time in more than a decade as rising interest rates have improved the yields, which have moved from next-to-nothing to healthy payouts.
Short duration has been the best place to invest, with rising interest rates having a larger effect on bonds with much further to maturity. However, if rates have peaked, now could be the time to lock in higher rates for longer.
Government bonds have been slightly preferred to corporates, while investment grade is more popular than high yield debt, as there is greater chance of default with the latter – particularly as the cost of refinancing debt has become so expensive.
Alternatives
In other investible assets, gold remains popular, despite rising rates, with the gold price around $2,000 per ounce. It is a safe-haven asset that performs well during times of market volatility and uncertainty – as we have seen recently.
Cash is also popular, for similar reasons to bonds, with savers able to secure a 5.2% interest rate on their easy-access savings, or more for those that lock in their cash for a year or two.
This has been visible through how investors are using cash. Although the top 10 most-bought funds and stocks among retail investors remain relatively unchanged – there are now one or two money market funds creeping into the list, suggesting some are looking at cash in other ways as well.
Property funds are under severe pressure with the announcement of recent closures in the sector, although infrastructure funds could be a good place to invest in the future if inflation remains high, as contracts tend to have some inflation linkage. It is unclear, however, whether this is already priced into markets.