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Will the markets offer some Christmas cheer?

Over the past few months, we’ve seen a partial recovery in markets. We think that’s been driven largely by optimism that inflation has peaked, at least in the Eurozone and the United States, and that Central Banks won’t need to hike rates by more than is currently expected.

With that in mind, financial analysis seems to have shifted a bit. The focus now is more firmly on growth next year – and the prospects for a recession. Recently, we’ve seen stronger than expected macro data out of the US – in terms of wage growth and job creation. And, in the curious logic of financial markets, good economic news like that has been taken as bad news for financial markets, as it raises the risk of higher interest rates for longer. All that could create a bit of short-term volatility. But overall, we think that economic activity will continue to slow over the coming months, but that if we do see a recession in the US and Europe, it should be relatively shallow.

The situation in the UK looks a bit more challenging. We’re looking set for a difficult few months – with high inflation, industrial action and slowing growth all set to take their toll. It’s worth keeping mind, though, that in a difficult year for financial assets, UK large cap equities have held up okay – thanks to their global earnings stream and a relatively weak currency. Small cap UK stocks have struggled, but we shouldn’t extrapolate that a weak UK economy is necessarily bad for all UK stocks.

In China, the government has been lifting COVID restrictions over the past few weeks, as demonstrations against those restrictions have increased. The impact will be interesting to monitor. On one hand, we could see a surge in cases. Vaccination rates particularly among older people aren’t especially high and China doesn’t have a lot of intensive care capacity. On the other hand, if the reopening is sustained, we could see an acceleration in economic activity that could provide a welcome boost to global growth, and that will probably matter more for financial markets.

Finally, we’re updating our long-term expected returns as we do at the end of every year.  We’ll talk more about those early next year, but after a difficult 2022, those 10-year forecasts are higher than they have been for some time.

With that, I just want to say thank you for watching, have a peaceful holiday season and all the best for 2023.

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Written by Richard Flax

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Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.

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