June 2023 MPS Market Review

• Global stock markets recaptured their momentum in June, ensuring it was a positive second quarter and rounding out a strong first half of the year.
  
• Such performance has confounded the market consensus, having previously anticipated a weak first half of 2023 and a recovery in the second.
• This ‘consensus’ centred upon growth concerns entering 2023, following the rapid increase in interest rates witnessed in 2022.
• Such fears were misplaced, however, as a strong labour market and high levels of savings combined to keep consumers active – particularly within the service sectors of the economy.
• The forestalling of a recession likely lifted downbeat sentiment therefore, and with it, share prices.
• With inflation remaining stubbornly high, however, the interest rate environment looks set to remain ‘restrictive’ for some time to come.
• Whilst a recession might be ‘delayed’, it is hard to envisage one being ‘denied’; with the situation looking increasingly perilous in the UK.
• 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.
• A recession that seems so widely predicted may not inflict the same damage as one that catches investors off-guard.
• The recession may not be so severe either, given 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 interest rates to cut! Such policy flexibility might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.
• A recession that arrives in 2024 also offers additional time for inflationary pressures to subside; affording Central Banks the option to take a more assertive dovish stance than if a recession were to hit sooner and inflation still riding high.
• Something of an ‘Artificial Intelligence’ frenzy has also gripped markets this year, as evidenced by outsized performance from a handful or large US Mega Cap tech names; and rather mediocre performance from the rest.
• Investors must be alert to the perils of missing out on any such ‘mania’ on the way up, but also participating on the way down.
• On balance, the Invesco MPS remains committed to the US Growth sector. MPS supporters, therefore, will have some exposure to this A.I. theme as part of an appropriately diversified portfolio.
• An A.I. led productivity boom may be a distant prospect but markets can look a long way into the future; particularly as wage inflation remains such a troubling force and A.I. offers a solution.
• Of course, the timing of any such outcome could well disappoint, hence Invesco’s insistence to diversify portfolios appropriately from a sector, regional and asset class perspective.
• There are other reasons beyond A.I. to believe the equity market rally can continue, however, not least the potential for abating inflation; though conceding the probability seems more likely internationally than at home.
• Weaker energy prices, healing supply chains, soft housing markets and potentials cracks in the (still firm) labour market could be the catalyst for this moderation; and one which would point to a sooner end to interest rate hikes.
• The fading prospect of a banking crisis could continue to lift sentiment too, and with surveys suggesting investor cash levels remain pretty high, FOMO could also play a role.
• 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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