Key themes for 2Q 2023
Recent banking turmoil to tighten credit conditions but this is not 2008
It seems likely that recent events in the banking sector will have some impact on bank lending standards, which will slow growth (Guide to the Markets – UK pg 23, pg 26, pg 37). We already anticipated a downturn in the US to squeeze out inflation (pg 14), so our base case for a moderate recession remains the same. Though the risk of a somewhat deeper recession has increased, we still think a 2008 style financial crisis is unlikely (pg 10, pg 11).
More confident we’re near peak rates
If the commercial banks tighten lending standards, the Federal Reserve and other central banks will need to do less to bring about the desired slowdown in activity and reduction in inflation (pg 8). Peak rates are now expected to be lower (pg 20, pg 30, pg 37) and investors should feel more confident that high quality bonds can offer income and diversification (pg 74).
Short-term uncertainties point to balance in portfolios
At this stage there are considerable uncertainties over the extent to which recent turmoil will affect sentiment and activity (pg 15, pg 26). It is also unclear how fast inflation rates will fall (pg 7) and how fast central banks will be able to re-focus policy to be more growth supportive. This uncertain economic backdrop argues against extreme positioning between or within asset classes.
Focus on quality
For now, investors should focus on quality across all asset classes (pg 52, pg 73). We remain confident that the era of zero and negative interest rates is behind us (pg 68), and that sound corporate fundamentals will be important in both equity and fixed income (pg 47, pg 71).