How did we do?
Following the rapid increase in interest rates by central banks through 2022, we expected inflation to moderate sooner than it has.
Headline inflation is trending lower, but core inflation is proving more persistent than anticipated, and this is what central banks are fixated on.
As a result, interest rates have continued to rise ahead of expectations, weighing on fixed interest returns and causing elevated levels of bond volatility. We believe that the lag effect of higher interest rates will become increasingly obvious in the next 12 months, and that interest rates will peak.
With slowing growth, we predicted corporates would ease up on their hiring plans and we’d see a moderation in labour market tightness. Redundancy announcements in IT, financials and telcos duly followed, but continued solid demand for labour in healthcare, leisure and service oriented sectors has kept the labour market buoyant. Cracks are starting to appear though, and we believe the labour market is not as strong as many assume.
We also predicted that quantitative tightening (QT) would become more widespread and, in conjunction with rising interest rates, squeeze liquidity hard. This will always increase the risk of unintended consequences and financial accidents, as seen in the failed regional US banks.
We foresaw China learning to live with Covid in 2023, but not the radical abandonment of their Zero Covid approach. This provided a sentiment boost towards Emerging Markets (EM), but it faded swiftly as Chinese growth in Q2 failed to keep up with investor expectations. Our overweight to EM has yet to deliver the upside we expected, but we remain confident that the valuations and cyclicality EM offers will drive improved returns once investors look beyond the peak in interest rates.
Our overweight to EM has yet to deliver the upside we expected, but we remain confident that the valuations and cyclicality EM offers will drive improved returns once investors look beyond the peak in interest rates.
