Leading Indicators | A ‘summer of angst’: Fact or fiction?
Discover key economic and financial metrics, and what to look out for in the week ahead.
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Here we look at the leading indicators in the world of economics.
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DEBATING A ‘SUMMER OF ANGST’
In most large economies, inflation is falling, unemployment remains low and economic growth is slowing but not stalling. When the US Federal Reserve Chair, Jerome Powell, hosts the Jackson Hole Economics Symposium on Thursday, attended by his international central bank peers, it is expected that he will hint at the end of the US tightening cycle, while underlining the need to keep interest rates higher for longer. Investors in the UK would welcome that messaging from the Bank of England. However, sterling money markets are currently pricing in a 25bps rate hike on 21st September and a further 50bps of tightening through March, taking the UK base rate to 6.0%. Whether well-founded or not, this anticipation of further rate hikes is stoking market volatility.
But where there is volatility lies opportunity. Brookfield stated recently that now is a “prime time to invest, selectively’’ in real estate. This aligns with our analysis of previous downturns where Investment Managers were typically among the first investor types to come back to the market.
POSITIONING FOR CLIMATE CHANGE
In August’s UK Business Insights and Conditions Survey (BICS), just 25.5% of businesses surveyed had assessed the risks of climate change. Of the companies taking action against climate change, 16.0% were adapting to temperature increases, 15.4% to supply chain disruption, 6.6% to increased flooding and 6.5% to water scarcity. For businesses yet to take action, 10.4% did not do so due to costs, 7.3% due to a lack of information or guidance and 17.8% because the businesses did not expect to be impacted by climate change effects. Meanwhile, a recent Cambridge Econometrics and Ortec Finance report assessed how a classic portfolio composed of 60% global equities and 40% bonds performed under varying climate situations. In the most optimistic “net zero” scenario, cumulative returns over 40 years were -10% lower than a baseline that assumed no climate change. The most pessimistic “failed transition” outcome (temp. rise above 4oC from pre-industrial levels by 2100) recorded cumulative returns -40% below the baseline. Businesses should therefore be positioning against climate change to mitigate the impact on returns.
AI REGULATION RACE BEGINS
In an attempt to cement a position as the centre of AI talent and adoption, the UK will host a summit in November on the safety of AI, with world leaders, academics and AI executives in attendance. The event aims to drive targeted, rapid international action and to build on developing the regulatory guardrails needed for the safe and responsible development of AI. While investment in AI technologies may ultimately be dominated by the likes of the US and China, the UK may still benefit from growth in the sector via its influence on regulation.
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