Recession Rally
So far in the third quarter of 2022 risk markets have rallied very strongly. This is pretty strange given that central banks have aggressively increased interest rates and talk of recession abound!
The main reasons for the recent rally are summarised below:
- Inflation concerns abating – recent US data releases confirming that US inflation looks to have peaked have led to investors expecting less aggressive rate rises from the Federal reserve going forward.
- Recession fears – it seems counterintuitive that markets have rallied whilst simultaneously starting to price in a recession in 2023! How does this make sense? Recession fears have caused a rotation back towards high-quality businesses that can trade through more difficult economic conditions and away from more economically sensitive cyclical businesses. Our focus is always on quality businesses with a strong competitive position and so this rotation has played to our long-term investment strategy. Recession fears have also led investors to expect less aggressive rate rises from central banks globally.
- Sentiment improving – investor sentiment was so weak at the end of June that it wasn’t going to take much good news to lead to an improvement and a subsequent rally in markets.
What happens now?
Markets will be led by inflation and growth data barring any further unexpected shocks. Valuations look fair against our expectations for the economy following a strong rally from recent lows. We still see little to no value in fixed income and the best potential for the long-term, above inflation returns remain high-quality companies and a mix of alternative assets that are uncorrelated to traditional equity markets. This is exactly what we hold within our client portfolios.
Opinions constitute our judgement as of this date and are subject to change without warning.