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Investment Monthly

Disinflationary paths
01 August 2023
    Download the full reportPDF, 4.78MB

    Key takeaways:

    • We believe a defensive portfolio positioning makes sense given the downside risks to riskier asset classes. Our central scenario of ‘Choppy Markets’ does not appear to be factored into many equity and credit markets
    • We have a preference for short-duration fixed income, which can outperform when a recession materialises. High-quality credits also offer good income opportunities with reduced default risk
    • Many EM asset classes are attractive given better valuations and the much better macro outlook vs DMs. The prospect of Fed cuts and further dollar weakness later in the year is also a plus

    Macro Outlook

    • In the West, disinflationary trends are underway, and are likely to continue given the amount of central bank policy tightening to date. Sticky core inflation is still is a key concern for central bankers though
    • In the US, upwardly revised growth figures are raising hopes of a soft landing. However, we maintain our view of a recession towards the end of 2023, as the more restrictive rate hikes start to meaningfully impact labour markets
    • In the East, benign inflation trends have already prompted central banks to pause hiking. Weaker global growth will drag on trade, but tailwinds from a weaker US dollar and pockets of supportive policy can keep growth resilient

    Policy Outlook

    • The Fed is likely at peak hawkishness following its recent 25bp hike. Stabilising monthly increases in core inflation are likely to prompt a pause, but we believe the first Fed rate cut will come at the end of 2023 as recession hits
    • The ECB recently delivered a ‘dovish hike’ of 25bp and dropped its especially hawkish tone of recent months. Further hiking is likely as it adopts a ‘data-dependent’ approach, but these may be limited given near-term growth risks
    • Rollouts of targeted fiscal policy support in China looks likely after the Politburo meeting. Following the Bank of Japan’s recent policy tweak, a gradual normalisation of the yield curve control framework looks likely