OUR INVESTMENT THEMES - JULY 2023 UPDATE

Why be more optimistic today?

Fears of economic recession are widespread, and have been for some time.

Manufacturing activity has weakened, but the momentum has improved: as the goods demand that had been turbocharged by reopening post-COVID lockdowns in 2021-22 has calmed, manufacturing activity globally has inevitably dipped.

At a global level, manufacturing activity looks a lot healthier. The JP Morgan Global Composite PMI output component remains robust at 54.4, well above 50 and thus still signalling positive manufacturing growth around the world.

Inflation is falling in US and Europe, but not in China: Yes of course, inflation rates are still generally too high for comfort in the US, UK and Europe right now.

But the good news is that inflation rates are falling in each of these geographies, and are likely to fall even faster over the next six months. Moreover, China simply does not have the same economic cycle and has no issue with inflation – China’s core CPI is only 0.6% year-on-year as of May, allowing the Chinese authorities to try to stimulate the economy via lower interest rates, in particular to boost domestic growth.

This fall in inflation is exactly what Western central banks have wanted to engineer with their programme of higher interest rates, and it seems to be working, albeit more slowly than we might have hoped.

Should we be more optimistic then? Statistically speaking, a “soft landing” where central banks raise interest rates to slow inflation and growth, but manage to curb inflation without triggering economic recession, is a rare beast. So we should not expect this to occur, in the normal course of events.

However, we have all been surprised by the resilience of the global economy in the face of a concerted campaign of higher benchmark interest rates in most countries.

Inflation is coming down, but growth has not (yet) evaporated. In the US, the Atlanta Fed GDPNow indicator points to a 1.8% GDP growth forecast (annualised) for Q2 this year, a decent rate of growth given the huge hike in interest rates over the past 12 months.

Perhaps then, the chance of achieving one of these rare “priced by stock soft landings” has improved, and this is being priced into financial markets in Europe, Japan and the US.