As inflationary fears ease, multi-asset investors should ignore wider market distractions and stay focused on investing in the right asset classes, at the right time for the current stage of the financial cycle, says Newton head of mixed assets investment, Paul Flood.

Key points:

Is inflation finally coming under control? After months of interest rate rises and concerted efforts by central banks such as the US Federal Reserve to ease inflationary fears, the measures appear to be working. November 2023 saw US inflation levels cool to 3.1% from a high of 9.1% in June 2022 with the UK market also showing a modest fall.

Yet while Newton’s Flood acknowledges the UK has seen its biggest drop in inflation in the UK since the early 1990s, he believes the economic outlook remains uncertain, with recession a strong possibility in 2024.

“Inflation is still quite high so we are not out of the woods yet,” he says. “A lot will depend on energy prices. As we go through the next 12 months we may find that the US economy remains resilient and we need to see wage inflation come back down to see what the US Fed does next.”

In this current uncertain backdrop, Flood believes it important investors keep a tight focus on the key assets most likely to generate strong returns.

“Investors need to avoid the short-term noise and focus on the bigger picture while trying to ensure they are investing in the right asset classes at the right time at the right stage of the financial cycle,” he says.

Bond boost

From an asset standpoint, the key question is: which way should investors turn next? According to Flood, both threats and opportunities abound in current markets, albeit with investors facing considerable risk and volatility. While he describes 2023 as a “less than stellar year” for alternative investments such as renewable energy, Flood still believes they remain broadly attractive.

Across more mainstream asset classes, Flood says bond markets in particular are showing signs of real recovery after a “horrible” 2022.

“Bond yields are looking increasingly attractive both here and in the US from the long end, in our view. After over a decade of mediocre relative real yields investors are now getting some true inflation protection from fixed income,” he adds.

While Flood also sees strong pockets of opportunity in equity markets, he points out that much of their success in 2023 was driven by large US technology companies, particularly the so-called ‘magnificent seven’, with a more mixed performance elsewhere.

“While equity markets have performed quite well in recent months, the success of the magnificent seven has tended to overshadow weakness among some other companies and sectors. For many equity investors it has actually been quite a challenging year, though price/earnings ratios do look to be improving and the equity market picture remains balanced as fiscal spending has remained supportive,” he adds.

For Professional Clients only. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

For further information visit the BNY Mellon Investment Management website:

ID: 1695190 Expires: 14 June 2024