November 2023*
Our baseline view remains a global slowdown in response to tighter monetary policy from developed market (DM) central banks. However, the exact timing remains uncertain given that excess pandemic savings and loose fiscal policy continue to support the US economy and hopes for a ‘soft landing’. Growing geopolitical risks in the Middle East add new uncertainty to the current cycle. Our allocations continue to balance these risks and identify opportunities.
Regionally, the trends are mixed. The US economy remained strong in Q3, recording 4.9% annualised growth. This pace should moderate closer to trend growth in Q4, but the Q3 print is still notable as it is not signalling an immediate recession risk to the US economy. We expect the long and variable monetary policy lags will weigh on activity and corporate earnings in 2024. However, excess pandemic savings and loose fiscal policy are supporting the US economy. The trend in Europe is less resilient. The Eurozone composite PMI recorded a new cyclical low of 46.5 in October, signalling a weaker backdrop. In China, the recovery remains fragile, but recent policy measures are starting to support the domestic economy, and we are seeing a stabilisation in several activity measures.
Geopolitical risks, as measured by the Geopolitical Risk (GPR) Index developed by Dario Caldara and Matteo lacoviello, spiked again in Q4 following events in the Middle East. Our baseline expectation is that the Israeli conflict will be contained and not lead to a major oil supply shock. However, the risk of more direct involvement from the US and Iran remains a possibility that could lead to severe disruptions to oil supplies in the region. This tail risk, in addition to the ongoing Russia-Ukraine war, will keep a risk premium in oil prices over the medium term, providing support for energy-linked assets.
Market Strategy: The global MSCI ACWI Index 12m forward PE remains elevated at 17x and vulnerable to further shocks from tighter financial conditions or elevated geopolitical risks. Despite expectations for a global slowdown in 2024, investors can still find strategic value within international equities. Indeed, the ACWI ex-USA Index is trading at a forward P/E of 13x, below its historical average. Since the last Quarterly Outlook, we made one change to our country allocation:
Chg | -2 | -1 | 0 | +1 | +2 | |
---|---|---|---|---|---|---|
US | – | |||||
Canada | – | |||||
Eurozone | – | |||||
Switzerland | – | |||||
UK | – | |||||
Japan | – | |||||
Australia | ↓ | |||||
EM | – |
Chg | -2 | -1 | 0 | +1 | +2 | |
---|---|---|---|---|---|---|
Canada | – | |||||
Eurozone | – | |||||
Switzerland | – | |||||
UK | – | |||||
Japan | – | |||||
Australia | ↓ | |||||
EM | – |
*This publication reflects asset performance up to 31 October 2023, and macro events and data releases up to 8 November, 2023, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.