Investing & Performance | 23 June 2023

Inflation, interest rates and impending recession – our latest market views

Coutts’ clients hear what our experts think about the big issues for investors at our recent event.

We’re likely to see more “economic pain” in Britain as interest rates stay high to tame rising prices, with mortgage holders hit particularly hard.

But inflation is falling in the US, which has a far greater impact on global investment returns, and there are signs its central bank could soon stop raising rates, which could be positive for markets.

Coutts’ clients heard our experts’ views on this and more at our latest exclusive quarterly investment event.

Core inflation in the US – which strips out fast-changing fuel and food prices – now sits at 5.3% for the 12 months to May, while in the UK it’s just risen to a 31-year high of 7.1%. Headline inflation, which includes fuel and food, usually hits headlines, but central banks tend to focus more on the core number as it gives a more accurate picture of an economy.

Lilian Chovin, Coutts’ Head of Asset Allocation, said at the event: “Most importantly, the numbers are heading in different directions. In the UK core inflation is still rising, while in the US it’s been falling since last September.

“The UK’s higher number and different trajectory means the Bank of England is perceived as having not done as good a job as the US Federal Reserve in tackling rising prices. And confidence in whether it will do a good job going forwards is low – one reason why mortgage rates are on the rise.”

He added: “While we still believe UK inflation will trend lower eventually, it will be slower than the US, and it will require more economic pain to get there.”

Stocks can stand firm against rising rates

Coutts’ Chief Investment Officer Alan Higgins told the audience the team had researched how high interest rates needed to go to really damage equity returns.

“It’s higher than most people think,” he said. “We found no correlation until interest rates go to about eight per cent. So while high inflation and interest rates have a direct impact on bonds, and we had a difficult year for bonds last year, equities can still perform.”

It’s always worth remembering past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in.

US recession is coming, but expected

Coutts’ own recession indicator currently shows a 70% chance of a US recession over the next 12 months. And in the past, when it’s been that high, it’s happened. But while such a development will make life more challenging for companies and, therefore, stock markets, Alan thinks the overall impact could be limited, because it’s expected.

“This is the most widely anticipated recession ever,” he said. “My sense is that any dip in market performance would be relatively shallow as a result. We don’t know for sure, but this recession is so well anticipated, it’s certainly possible that it won’t have a huge impact.”

Lilian agreed, adding: “Central banks are almost expecting a recession – it can be the price to pay to get inflation lower. Corporates have had time to prepare for it, and so have investors. So unless we get a very different outcome from what people currently expect, markets could be very resilient."

For more information about investing with Coutts Crown Dependencies, speak to your private banker.


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