- The global economy continues to be characterised by slow growth and increasing uncertainty. While some sectors are showing some resilience, tariffs, inflation, and geopolitical risks are creating a complex and challenging backdrop for investors alike, which demands a risk-aware approach.
- There are signs tariffs are beginning to contribute to higher consumer prices in the US, but it is still very early to assess their impact with the data at hand, and there is some evidence to suggest the impact for some countries is lower than originally considered, particularly Canada and Mexico, highlighting the uneven impact from their effects.
- Global growth is slowing, and the U.S. has yet to feel the full impact of tariffs, keeping the outlook subdued. This deceleration is pressuring the jobs market, which is in a ‘no hiring, no firing’ phase. This is not likely to result in a significant rise in unemployment, but this slowing jobs market could ultimately result in a more cautious consumer. Upcoming US tax refunds will provide a partial offset to this negative trend. Even in the UK and Europe, in aggregate, the consumer looks in relatively good health and strong enough to weather this cooling backdrop.
- On interest rates, the outlook continues to evolve. In the US, concerns about the stagnating jobs market prompted an interest rate cut in September, but also a change in expectations that there will be more cuts in relatively short order. Whilst inflation is no longer front and centre of the Fed’s concerns, surprises to the upside could have a large effect on markets. In the UK, inflation remains more persistent, potentially delaying further Bank of England rate cuts to next year. The Bank of England did manage to cut in August, remaining consistent in its ‘slow and steady’ pace of cuts. The European Central Bank (ECB) seems to be nearing/at the end of its rate-cutting cycle.
- In fixed income, yields remain attractive, and the income generated is a primary driver of returns. Demand for bonds has remained strong, particularly for investment grade credit, even with substantial new supply in the market. We continue to like fixed income for its yield and defensive balance against potential equity market volatility but remain wary of both interest rate risk and tight credit spreads.
- Despite turbulence around tariff announcements in April, global equity markets have generally performed well this year. After years of US equity market dominance, a strong broadening out of returns is a notable feature of the year. Europe, emerging markets and even the UK have been positive contributors to portfolio returns. Within equities there remains a broad divergence – for the strongest earnings, the premium is high; for the best value, the catalyst in unlocking that remains unclear. Maintaining diversified portfolios across sectors and geographies is crucial in this environment.
- Whilst sterling has strengthened against the US dollar and the yen, this year has seen a steady weakening against the euro. The strong consensus is for the US dollar to continue to weaken.
- Gold continues its seemingly unending upward path – it started the year at $2600 and recently hit (another) yearly high, breaking through $3,800. Meanwhile, the Brent Crude price slips lower, from c.$75/bbl in January to $66 by the end of September.
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