November 2023 MPS Market Review

· Global stocks and bonds enjoyed a dazzling recovery in November, offering a stark turnaround from the market’s post-summer blues.

· The catalyst for the change in fortune appears to be the continuing disinflationary trends i.e., lower inflation, and the moderating (but still positive) growth backdrop.

· The combination of fading inflation and a cooling economy is considered a ‘Goldilocks’ scenario; one that would allow central banks to act in a more accommodative fashion, without the risk of overheating the economy.

· Historically, and recently, a ‘Goldilocks’ backdrop has been a rewarding one for equity investors.

· Given our expectations the disinflationary trends can persist, and that economic growth can remain resilient (supported by high levels of employment), there is certainly scope for markets to ride the ‘Goldilocks’ wave for (perhaps several) months ahead.

· The explanation for quite such a dramatic rise in share prices, however, likely stems from the markets’ increasing hopes of a ‘Soft-Landing’.

· In this scenario inflation falls fast enough such that central banks are able to cut interest rates sufficiently swiftly to stimulate (rather than restrict) the economy and prevent unemployment from rising (at least meaningfully), and a recession is avoided.

· Unfortunately, there is a material risk markets have gotten a little overexcited by this prospect.

· Whilst there is good reason to believe the cracks appearing in the labour market can weigh on demand for goods, services and housing, helping to prolong the disinflationary trend, hopes growth can remain positive throughout 2024 might be a step too far.

· No doubt the market has been surprised by the resilience of the economy to prior interest rate hikes, but the ‘long and variable lags’ to policy changes should remain firmly in our thoughts.

· Whilst certain mortgage deals may allow segments of the economy to avoid the full force of interest rate hikes, not every consumer will be in such a fortuitous position.

· What is more, many channels of financing, such as credit cards, overdrafts and corporate lending will be much more sensitive to interest rate changes and will continue to bite into the economy as we move through 2024.

· There is good reason to believe the ‘Goldilocks’/’Soft-Landing’ narrative can continue to dominate market sentiment for the time being, but with risks of recession still prominent for the second half of 2024, investors should be preparing for at least a modest defensive pivot in the coming quarters.

· There are, of course, risks to our current, more positive stance; with a recession coming sooner than anticipated front of mind.

· Unfortunately, there are several credible reasons why we may see such an outcome.

· Of immediate concern are the geopolitical challenges in the Middle East, and the threat it draws international actors deeper into the conflict, serving to restrict global oil supplies and sending prices spiralling. This would be a crushing blow to the global economy.

· Less frightening scenarios may deliver a similarly bruising result, however. More cautious behaviour from banks fearing a recession would be one example, with an analogous ‘fear induced’ change in spending patterns from consumers another.

· A final example would be a hawkish policy shift from central banks, provoked by (a single or collection of) data points informing the inflationary threat is returning.

· Investors should brace themselves, therefore, for the potential of a more volatile period ahead, as markets fret between extremes of soft-landing euphoria and recession.

· Yet, even in recession, we would argue all may not be lost for equity investors. 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 facing quite such daunting refinancings challenges (except maybe UK mortgage holders) as in prior economic cycles.

· 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.

· Recognising how uncertain the outlook remains, 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.

· Finally, may we take this opportunity to wish you a restful and joyous holiday season and a prosperous new year.

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