We hope you are keeping well and have enjoyed or are about to enjoy a well-deserved summer break. Unfortunately, cooler and damper domestic conditions have frustrated ‘staycationers’ and English cricket fans alike, however, the punishing and brutal heatwave engulfed much of continental Europe is of far more concern. We hope, therefore, wherever you found or find yourselves, it has a pleasant and rejuvenating experience.

Much like European temperatures, stock markets continued to climb higher through July also, building upon the first half’s success. Such performance actually confounded a bearish consensus early in the year; however, it appears sentiment has generally become much more positive of late.

The growing optimism would seem to be driven, at least in part, by an increasing expectation the US might achieve, an all too rare, soft landing i.e., avoid a recession. Investor confidence has also likely been buoyed by moderating inflationary pressure and the prospect of an imminent end to interest rate hikes. Indeed, the combination of resilient growth and less hawkish monetary policy remains the centrepiece of our own preference for equities – albeit a modest one.

The key to each of these outcomes is the continuation of falling inflationary prints; given it serves to boost consumer spending power, whilst also extending central banks the flexibility to be more accommodating with interest rate policy. Fortunately, weaker energy prices (year over year), healing supply chains, soft housing markets and potential cracks in the (still firm) labour market, inform fading inflation can remain a core expectation and, therefore, supports a modest risk-taking investment strategy.

We must remind ourselves, however, that forecasting inflation is a notoriously tricky exercise. What is more, we should be alert to the risks that falling inflation, in as much as it serves to boost real income and demand, may itself be the catalyst for reaccelerating inflation. Should we see more persistent or reaccelerating inflation than currently anticipated, and should it lead to hawkish surprises from the major central banks, then recessionary risks would re-emerge. In such an environment one would expect equity markets to endure a more difficult period; not least given the impressive recovery in share prices over recent months.

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. 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 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 some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm. The prospect for an A.I. led productivity boom may also soothe re-emerging inflationary concerns though, admittedly, A.I. does seem a slightly more longer-term theme.

Kind regards,

iPensions Wealth Team

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