Post Peak

Our September Cyclical Forum was the first to be held in London, where the economic situation today reflects what’s happening around the world.

The Bank of England (BOE) is nearing the end of a long journey to raise interest rates. This tightening of monetary policy has fueled increased volatility in U.K. financial markets, and there are concerns that the British economy could soon stall or slip into a recession.

Similar scenarios are playing out globally as countries continue their efforts to quell the post-pandemic inflationary spike. Central banks are reaching the end of their tightening cycles on different schedules and with different peak policy rates in sight.

We believe both growth and inflation have peaked. We expect growth across developed market (DM) economies to slow to varying degrees, and in some cases to contract. This year’s broad-based economic resilience will likely give way to weakness next year as sources of fiscal support diminish and the delayed effects of tighter monetary policy exert a stronger global influence.

This collective slowdown may also play out differently across countries depending on their sensitivity to changing interest rates. Structural differences in housing markets and mortgage financing will play a role. We arrived at five key economic themes and three investment themes for our six- to 12-month cyclical horizon, which we discuss in the next sections.

In this environment, we look to emphasize global investment opportunities and to diversify our sources of interest rate exposure across debt maturities and countries. At current price levels, riskier assets such as stocks do not price sufficient downside risk for the possibility of a deeper recession, in our view.

Higher yields – both nominal and inflation-adjusted – than have been seen over the past decade and cooling inflation make us more sanguine about the prospects for fixed income. As always, we position portfolios for a broad set of macroeconomic and market outcomes beyond our baseline scenario.