Making sense of changing macroeconomic realities

Interest rates are likely to stay higher for longer in many countries, recession risks remain, and inflationary pressures are easing albeit still elevated. China’s growth has stumbled; at the same time, the US economy has held up well, thanks to the resilience of several sectors. 

Is a US recession off the table? What does a higher-for-longer rate environment mean for markets and investors? How might global supply chains shift?

The macroeconomic climate has led to increased volatility across asset classes. Fund managers give their take on how investors can position their portfolios in these uncertain times.

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Global market outlooks—Too hot, too cold or just right?

Franklin Templeton, 3 Oct 2023

“There are significant risks as to whether US economic resilience will continue into the fourth quarter and beyond. Many of the reasons for the US economy’s resilience are starting to fade. Looking at the fourth quarter of 2023, US student loan repayments will resume, which will likely be a drag on spending. The continuing threat of a government shutdown later in the year could be a negative for growth. Typically, there is a one- to two-year lag between higher interest rates and their impact on employment growth. The Federal Reserve started hiking around 18 months ago, indicating that a slowdown is more likely going forward.”

“The uncertainty surrounding a US government shutdown highlights the long-term challenge of fiscal stability. Although we just avoided a shutdown, it seems likely that another standoff will occur due to Congress’ dysfunction in its ability to reach a compromise agreement. The interest expenses as a percentage of the budget are huge and will grow as interest rates have risen. Because much of the government bond issuance is on the short end of the curve due to higher demand for those instruments, this exposes the overall budget to rising rates as bonds mature. Despite this, our panel still believes the US dollar will remain the world’s reserve currency, primarily because there is no alternative that meets all the requirements at this time.”

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Guide to recessions: Nine things you need to know

Capital Group, 11 Sept 2023

“The good news is that recessions generally haven’t lasted very long. Our analysis of 11 cycles since 1950 shows that recessions have persisted between two and 18 months, with the average spanning about 10 months. For those directly affected by job loss or business closures, that can feel like an eternity. But investors with a long-term investment horizon would be better served looking at the full picture.”

Recessions are painful, but expansions have been powerful

“Aggressive market-timing moves, such as shifting an entire portfolio into cash, can backfire. Some of the strongest returns may occur during the late stages of an economic cycle or immediately after a market bottom. An averaging strategy, in which investors systematically invest equal amounts at regular intervals, may be beneficial in down markets. This approach allows investors to purchase more shares at lower prices while remaining positioned for when the market eventually rebounds.”

“With the economy entering a period of uncertainty, it’s especially critical to focus on bond holdings that can help provide balance to their portfolios. Investors don’t necessarily need to increase their bond allocation ahead of a recession, but can review their exposure to ensure it is positioned to provide diversification from equities, income, capital preservation and inflation protection — what we consider the four key roles fixed income can play in a well-diversified portfolio.”

High-quality bonds have shown resilience when stock markets are unsettled

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Shifting macro trends in the aftershock economy

PIMCO, 8 Sept 2023

Used with permission from PIMCO

“Critical macroeconomic trends, including a shift in globalisation and the continued rise of nationalism, may contribute to relatively low global growth over the secular horizon of the next five years.”

“The US dollar will in all likelihood continue as the world’s dominant currency over the secular horizon… The US has the largest, deepest, and most varied capital markets, so holders of dollars can find places to put their money. The US doesn’t have capital controls. Also, notwithstanding the recent global experience, inflation has been overall low and steady in the US for decades. In addition, there are what economists call network effects: People use the dollar because everyone else uses the dollar.”

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To be continued – how the Asian growth story is evolving

Fidelity International, 4 Sept 2023

“Disrupted supply chains are hastening the process of decoupling, and companies are increasingly looking to move their supply chains both closer to home (the trend of nearshoring) or to friendly partner countries (that of ‘friendshoring’). The China +1 strategy is a key dynamic, as developed-market companies spread out production to other countries with low-wage, high-skilled economies. This trend is also driving greater dispersion in returns among emerging economies. Countries such as India, Indonesia, and Vietnam will particularly benefit.”

“In summary, we see a number of positive short and medium-term drivers for emerging market equities, with positive macroeconomic tailwinds, a more robust commodity price environment, and an improved fiscal backdrop. Given that current valuations are at trough levels and seemingly out of sync with the improved fundamental environment, we think a particularly attractive entry point exists today for the Asian emerging market equity asset class.”

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Supply chains and sustainability

Natixis | Mirova, 8 Aug 2023

“Back in April 2020… the pandemic yet again highlighted the fallacy of centralising all your production centres into one city… Fast forward a few years and — in Europe’s reliance on Russian gas, and the ongoing semiconductor battle between the US and China — we see why depending too much on one company, one country or one trade route, can mean you risk paying a heavy price if there is disruption.”

“How significant have the recent geopolitical tensions between the US and China been for global supply chains? In the semiconductor industry, the politics work on both sides… It’s worth considering that over 90% of the semiconductors that are really important to the economy are produced in China and Taiwan. So, if trading comes to a standstill, the US economy is not going to grow, and we won’t be able to replace things. We don't control those countries and we don’t want China to put the US, UK, or France under political pressure by stopping production of semiconductors.”

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Building a resilient long-term investment portfolio through Endowus

It is impossible to predict how macroeconomic events would play out, or to prepare for any consequent implications on your investments.

However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, intelligent, low-cost funds and portfolios seamlessly.

Click here to get started with your investing journey with Endowus today. To explore Best-In-Class Funds from leading global fund managers, check out the Endowus Fund Smart platform.

Read more:

• Taking stock of experts’ market forecasts
• Recession or not, here's how to invest in uncertain times, in seven charts‍
• Is China's slowdown cause for concern?‍
• Fed rate hikes and recession odds: Will the US pull off a soft landing?

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Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

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