Invesco: The big headlines: Quarter 1 2023

BG: “Markets were gripped by fear of systemic banking failure in early March, though the better starting capital position within the sector and the swift policy response from central banks largely addressed these concerns. Growing confidence a banking collapse can be avoided may continue to support markets in short-term, however, risks are two-way. Improved bank solvency may also provide cover for central banks to return to a more hawkish footing in tackling inflation – something markets might struggle to deal with.”

DA: “China’s quicker than expected reopening is undoubtedly a positive for economic growth. While much of the benefit will be felt within China itself via the recovery of domestic demand, the effects may also be felt more widely across Asia and beyond. Most obviously reopening will positively impact demand for services and international travel but demand for goods and commodities would also improve should investment pick up. Despite their bounce of nearly 40% since last November’s low, we remain cautiously constructive on Chinese equities, and indeed emerging markets in general. While investing in Chinese equities is never without risk, they are attractively valued and remain well below their peak of early 2021, which provides comfort.”

BG: “I take a slightly more cautious view. As one of the world’s largest economies, the dramatic removal of China’s zero-covid policy has been met with lofty expectations from markets. Akin to the Western reopening, however, investors should largely anticipate China’s domestic service economy to enjoy the greatest benefit. This domestic focus should be a better news story for Chinese markets, however, which is further supported by the relative valuation appeal versus international markets. Despite these clear positives we would caution against too much enthusiasm given the Geopolitical challenges that persist, and the moribund housing market in the absence of significant levels of stimulus.”

Falling fossil fuels

Wholesale gas prices fell across the first quarter of the year, sparking hopes of the start of a downward trend for energy bills.

BG: “The collapse in fossil fuel prices is a significant win for European consumers and businesses in particular. Not only does this outcome support growth by reducing strain on consumer wallets and corporate budgets, it should also feed through to the inflation calculation (over time). If inflationary pressures continue to fade then anticipation will grow for a more accommodative path for interest rate policy which would typically bolster investor sentiment.”

Growing pains?

Chancellor Jeremy Hunt’s growth-focused spring budget aims to set the UK on a path to avoid recession.

DA: “The market reaction to the spring budget was thankfully very different to September’s ‘mini-budget’. This was the Chancellor’s first real chance to set out meaningful measures given his Autumn statement in November was chiefly an exercise in restoring financial and political stability. It is easy to forget that this Chancellor is the UK’s fourth Chancellor in the last 12 months! This budget was arguably less about one big measure and more about a continuation of current policies combined with a number of smaller new measures, mainly focused on the supply-side. Pension allowance changes and support for childcare costs could lead to improvements in the supply of labour. For investors, the capital gains tax threshold will be halved and then halved again over the next couple of years. This could affect those who tend sell down their investments to generate income. Despite this, falls in energy prices, robust labour markets, and government fiscal support has helped the UK economy avoid a recession. In the UK equity landscape, we prefer the more domestically focused smaller companies, which look attractive to us on a three-year view.”

DA: “Europe’s proximity to the war meant that the market initially priced in a risk premium for European equities. This subsided as it became increasingly clear that the worst-feared scenario for energy supply and economies in the region would not necessarily happen. In fact, European equities are higher today in local currency terms than they were on the day of the Russian invasion on 24 February 2022. Now, investors are arguably more focused on the impact that higher interest rates are having on economic activity and asset markets around the world. However, by their very nature, conflicts are unpredictable, and investors should remain alert.”

² On average across the range.

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Important information

All information as at 31 March 2023 and sourced by Invesco unless otherwise stated.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

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