The former has yet to arrive, and most equity indices have avoided any additional sharp losses. Indeed, far from heading lower in 2023, equities as an asset class have performed well, with record highs for the Dax and CAC40, and US markets have recovered much of the ground lost in 2022.
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As we get back to our desks following the summer, what can investors expect next?
The macro picture
Since the end of 2021, global monetary policy has tightened significantly.
Interest rates have gone from record lows to multi-year highs at a pace that many feared would spark a major slowdown in the global economy. Yet perhaps the biggest surprise of the year was that the financial system did not break.
A global ecosystem that many had argued was sustained solely by ultra-loose monetary policy has held together well.
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Inflation remains a headache, particularly in the UK. Consumers across the globe have seen their incomes squeezed, though wages have risen over the same period, even if they have lagged behind prices.
It looks like the world has left the post-2009 era far behind, and a world of higher inflation is now a permanent fixture. While it will irk the average consumer, profit margins have remained resilient, cushioning earnings around the world.
What to expect in Q4
Investors remain jumpy about the prospect of a recession, though only the most pessimistic still expect one to begin in the remaining months of 2023. Instead, 2024 is now seen as a year that could provide a period of significantly weaker economic growth, or even outright contraction.
But it is hard at present to see exactly where one would come from.
Barring a sudden and dramatic upsurge in inflation that necessitated a major policy response from central banks, the overall picture remains positive. GDP growth remains healthy, and even consumer spending has held up better than feared.
UK assets still carry Mini Budget risk premium
It is also important to look back at previous years. The final quarter of the year is historically a strong one for stock markets globally, and this is particularly true of US pre-election years. Indeed, 2023 has so far adhered to a ‘typical’ pre-election year, with an overall uptrend marked by shallow pullbacks.
It is true that China’s economy has entered a rough patch, but stimulus measures there have borne some initial fruit at least in terms of investor confidence.
Globally, fund managers remain cautious on equities, but a chase into year-end could see flows provide further support to stocks.
For the moment at least, the buyers still seem to be in charge.
Trader sentiment cautiously positive
Looking at our most recent client survey, a bi-annual review into IG Group’s core markets to understand clients’ sentiment, confidence, concerns as well as outlook on their financial goals, ambitions, financial markets, portfolio performance and future trading intentions, provided results which suggest cautious optimism.
Concerns about the health of the UK economy remain high, although are lower than was the case in January, falling from 82% in January to 71% in June.
It was also revealed that the strongest performance over the next six months was to be expected in the energy, semiconductor and technology equipment sectors.
This seems to suggest that clients expect the strong performance of the Nasdaq 100 to continue, no doubt partly influenced by the excitement around artificial intelligence.
UK assets still carry Mini Budget risk premium
Expectations that energy will do well reflect the belief that the oil market remains tight and that demand may recover in coming months.
Recent strength in oil gives further backing to this view, which of course raises the risk of a resurgence in inflation later in the year and into 2024, with the corresponding potential for renewed hiking efforts by global central banks.
Mirroring the wider market rotation out of tech and growth into value and defensive stocks, our clients are expecting energy and banks to do well in the next six months, and real estate and retail the sectors to see the largest declines.
Asian indices are expected to perform strongly compared to the US and Europe, with the Nikkei leading the way.
As one of the year’s strong performers so far, this perhaps reflects existing momentum, but with the Bank of Japan still only cautiously edging towards more hawkish monetary policy, there is scope for more upside in Japanese equities.
What is next?
2023 has been the year of surprises for investors and the remainder of it could continue to keep everyone on their toes. The gloom of the first half of the year has lessened, but fears of a recession still lurk as we head into those longer nights.
Chris Beauchamp is chief market analyst at IG Group
