Liontrust MA Quarter In Review Q3-2022 15.11.22 (Spreads) - Flipbook - Page 17
All eyes on the US as central bank activity ramps up
As the world’s leading economy, it is unsurprising that the focus of
many fund managers is the US. The key question facing markets
today is how far the Federal Reserve will go to combat inflation and
the extent to which this will drive an economic downturn.
The hope is that the Fed will be able to engineer a soft landing
and one US fund manager we met over the quarter believes the
US economy has made progress towards this. But the manager
adds: “The Fed is not likely to pivot from its policy at present. For
households, they are benefiting from the employment environment.
For the government, its debt has benefited from the Fed, which is
the new buyer in recent years. Although more debt may cause the
interest burden to increase rapidly, this is not enough of a concern to
deter the Fed from its tightening plan.”
Another US Manager points out that historically, although the
S&P500’s average returns have been positive in the fourth quarter,
the odds of a recession have risen to 70%, which poses a challenge
to any such rally. The manager says: “It would be seen as a
countertrend if there were a rally. Equity markets usually bottom in
the middle of a recession but not before it.” The manager believes in
defensive and high-quality dividend growth stocks.
If the Fed were to prioritise inflation control over economic growth
though, then this would be more favourable for international equities
over the US, and value over growth stocks. “Duration can be added
back to portfolios because economic growth is expected to slow,
which implies lower rates,” the manager says.
US equities have been trending down in 2022 and have hit
successive new lows amid high volatility. A different US fund
manager observes that equities are likely to rebound temporarily
even if there is only a modest improvement in economic data.
“Such rebounds are still considered to be bear market rallies until
the Fed shifts its focus from fighting inflation to supporting growth.”
Here on the other side of the Atlantic, the prospects of a recession
continue to worsen, according to another fund manager, thanks
to the energy crisis: “Electricity prices have surged to more than
15 times the pre-COVID level, stemming from droughts, cuts in
Russian supplies and summer heat. Inflation in the EU is running
ahead of that in the US and this has increased the likelihood of
a recession.”
1 year and 3 year inflation expectations
8%
Inflation expectations: Median 1 year ahead
Inflation expectations: Median 3 year ahead
6%
4%
2%
0%
Jul-13
Aug-14
Oct-15
Dec-16
Jan-18
Mar-19
May-20
Jun-21
Aug-22
Source: Liontrust & Bloomberg, as at 15.08.22
Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q3 2022 - 17
