WHAT IS THE OUTLOOK FOR STOCK MARKETS?

04.09.2023 The last year has been characterised by rapidly rising interest rates in response to high rates of inflation. As inflation falls back we look at the outlook for economic growth and equities.

Inflation has begun to moderate this year across the globe. However, high wage growth especially in Europe, due to tight labour markets remains a hot spot.  This is still feeding through into strong service sector inflation.

Economic growth, so far, has proved surprisingly resilient. However, the outlook for economic growth is more nuanced. Falling inflation will ease the cost of living crisis. However, this will be offset by the lagged impact of the aggressive interest rate rises of the last year.

Despite the abolition of the economically restrictive zero Covid policies the Chinese economy has struggled to return to growth. This partly reflects the global downturn in manufacturing. However, it also reflects longer term headwinds. Post Covid some multi-nationals are trying to diversify their supply chains by moving some manufacturing out of China. Additionally, there is a property downturn that is being driven by a falling population. The big concern is whether a large number of bad loans in the property sector could trigger an economy wide credit crunch. However, because the banks in China are state owned it should be able to manage the problem better than when the advanced economies were faced with the same problem in 2008-09.

The outlook for equity markets over the next six months is mixed. The impact of the aggressive rate rises of the last year is likely to be counter balanced by the positive impact of falling inflation on consumer spending power. What equity markets really want is for central banks to announce a pause in the cycle of interest rate rises. This would allow them to assume that the next move would be down. However, this is unlikely to happen until unemployment has risen and wage growth has moderated.

Currently there is some evidence that companies are starting to become more cautious about hiring. So, the next six months should see unemployment edge up and wage growth begin to slow. This would open the way for interest rate cuts in the second half of 2024. So, I think that it makes sense to continue to buy the sell-offs.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin