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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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

“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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Building portfolios during economic uncertainty

Franklin Templeton, 6 Sept 2023

“Interest rates may stay higher for longer than anticipated… (We) don’t think the Fed is in a rush to lower interest rates anytime soon and would be surprised if it happens in the first half of 2024. The Fed has to ensure inflation isn’t just falling, but also gain confidence that prices are anchored for a period of time and no longer detrimental to the economy.”

“The US economy may avoid a recession, but Europe is facing economic challenges… While we anticipate a slowdown and not a recession in the first half of 2024 in the United States, recessions are either already underway or look likely in certain regions of Europe where economies are more vulnerable. We are less sanguine about growth prospects and see more sticky inflation across Europe.”

“Many emerging markets are ahead of developed economies in terms of where they are in their economic cycle. They saw inflation ramp up quickly post-pandemic but reacted even more quickly. With those emerging market central banks starting to ease, both earnings and valuations may see tailwinds.”

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The cost of higher for longer

Fidelity International, 4 Sept 2023

“With US labour markets still strong, the Federal Reserve is sticking to its ‘higher for longer’ messaging. But the economy may see a shock next year when the effects of sharply higher interest rates come to bear.”

“The transmission channel by which higher rates have an impact on growth and inflation is delayed, not broken. So the economy will start to respond, especially on the labour market side, and that should start to put sustained downward pressure on inflation going forward. There will be a cost to pay in terms of growth, and we remain in the recession camp for next year.”

“We have to watch the debt refinancing very, very carefully. Our own surveys show the majority of our sector analysts expect at least a 15% to 25% increase in interest expenses for companies they cover. We need to think about the distribution of this increase in interest expense, whether it’s large cap versus small cap, or mid cap equities. In fixed income, you have to think about the default rates, which are starting to kick up.”

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Seizing late-cycle opportunities

Goldman Sachs Asset Management, 7 Aug 2023

“Fixed income resilience: One upside of the transition to a higher rate regime is that the forward income and total return potential of core bonds, such as high-quality government bonds, has improved significantly. They have also delivered positive returns in past recessions and may act as an important ballast to portfolios should an adverse scenario materialise in this cycle.”

“Diversification matters in a dislocated global cycle… While the Fed may be approaching the end of its hiking campaign, further tightening may be required by the European Central Bank and Bank of England to keep a lid on prices… Beyond advanced economies, emerging markets are moving at their own pace, resulting in a desynchronised global cycle.”

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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?