Winter Outlook

Most Likely: Inflation remains stubbornly high and the gloomy economic picture deteriorates as the country slides further into recession. Large companies continue to protect their share price and earnings better than small and mid-sized companies. Companies closely tied to consumers will continue to suffer more than less exposed peers such as healthcare, staples and utilities. Banks should continue to be supported in this environment.

Worst Case: Further cuts to Russian gas exports causes energy bills to climb higher. Aggressive interest rate rises cause a deep recession and send stocks and bonds plummeting, accompanied by a rapid increase in unemployment. This culminates in the collapse of an unexpected area of the market leading to a run on the wider market. The UK should be more defensive than other areas, given lower relative valuation levels.

Best Case: Central bank rate hikes cause inflation to fall without affecting unemployment and GDP. From its low valuation base, the UK rebounds further than other markets. A stable government helps to further calm markets unsettled by Liz Truss’s premiership. An end to the war in Ukraine helps to further reduce inflation. Flows into UK equities turn positive as smaller companies stand to benefit the most.

Most Likely: Central banks persevere with rate hikes but at a slower pace as inflation begins to slow. Monetary tightening is felt more acutely in the real economy with corporate profits likely to disappoint. Defensive sectors, such as consumer staples and healthcare, outperform alongside quality stocks. Cyclical sectors, like consumer discretionary, are likely to be under pressure.

Worst Case: China’s Covid outbreak and housing crisis intensify. Global supply shortages and high inflation forces consumers to dramatically cut discretionary spending as they face a cost-of-living crisis. Central banks keep tightening interest rates and a deep global recession ensues. The global slowdown and rising input costs are likely to trigger a global profit recession, as defensive areas offer better downside protection.

Best Case: Lifting of Chinese Covid restrictions boosts sentiment. As inflation returns to more normal levels, global-recession fears dissipate. The progressive easing of input costs helps protect corporate earnings. Economic growth regains momentum, giving a boost to cyclical sectors such as industrials and consumer discretionary, while growth stocks with high valuations benefit from a stabilisation in monetary policy.

Most Likely: High inflation means countries dependent on external financing could face pressure as the US Federal Reserve maintains high interest rates, leading to a strong dollar. High inflation can be a relative advantage for commodity-producing countries, but there are others, such as India, which are heavily exposed to food imports and could experience economic pressure. China’s recent easing of Covid restrictions is positive but the potential impact is not yet clear.

Worst Case: China experiences headwinds from foreign regulation, Covid and a struggling property market. A Chinese invasion of Taiwan would have a material impact on emerging markets, but also has the potential to create a strong economic shock globally. The magnitude of this risk is great but the probability of its occurrence is relatively low.

Best Case: A pause in US Federal Reserve rate rises would be extremely beneficial, primarily due to downward pressure on the value of the dollar. The lifting of Chinese Covid restrictions could provide a strong tailwind to China and its trading partners. The new Brazilian president proves supportive of equity markets which flourish given the strong underlying fundamentals of the economy.