July 2023 MPS Market Review

• July saw no let-up in stock market momentum as further gains built upon the first half’s success.
• Such performance confounded a bearish consensus early in the year; however, it appears sentiment has generally become much more positive of late.
• The growing optimism would seem to be driven, at least in part, by an increasing expectation the US might achieve, an all too rare, soft landing i.e., avoid a recession.
• Investor confidence has also likely been buoyed by moderating inflationary pressure and the prospect of an imminent end to interest rate hikes.
• Indeed, the combination of resilient growth and less hawkish monetary policy remains the centrepiece of our own preference for equities – albeit a modest one.
• The key to each of these outcomes is the continuation of falling inflationary prints; given it serves to boost consumer spending power, whilst also extending central banks the flexibility to be more accommodating with interest rate policy.
• Fortunately, weaker energy prices (year over year), healing supply chains, soft housing markets and potentials cracks in the (still firm) labour market, inform fading inflation can remain a core expectation and, therefore, supports a modest risk-taking investment strategy. 
• We must remind ourselves, however, that forecasting inflation is a notoriously tricky exercise. What is more, we should be alert to the risks that falling inflation, in as much as it serves to boost real income and demand, may itself be the catalyst for reaccelerating inflation.
• Should we see more persistent or reaccelerating inflation than currently anticipated, and should it lead to hawkish surprises from the major central banks, then recessionary risks would re-emerge.
• In such an environment one would expect equity markets to endure a more difficult period; not least given the impressive recovery in share prices over recent months.
• Investors should brace themselves for further volatility on this basis, but we would again argue all may not be lost for equity investors in such a setting.
• Of most comfort would be the hope any such recession wouldn’t be as severe as more recent episodes.
• This more benign view hinges upon the apparent absence of major economic imbalances i.e. corporations and households don’t (in aggregate) appear to be shouldering quite so much leverage as in prior, more devastating recessions.
• We should also remind ourselves that having moved off the zero bound, there are now some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.
• The prospect for an A.I. led productivity boom may also soothe re-emerging inflationary concerns though, admittedly, A.I. does seem a slightly more longer-term theme.
• Recognising the outlook remains uncertain, however, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• Relative to stocks for example, high quality corporate and government bonds might offer a more defensive return profile in the face of less encouraging growth outcomes, particularly given the increase in yields observed over recent months.
• Alternative asset classes also assist Invesco in its efforts to help diversify portfolios in a more troubling period for stock markets.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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