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Quarterly Macro

Three themes for Q3 2023

Three Themes for Q3

Speakers: Karim Chedid, Varia Pechurina

KC: Hi, I'm Karim, and I'm going to talk to you about our midyear outlook. We believe a new economic regime is playing out, where growth and inflation are likely to fluctuate more than in the past, leading to higher market volatility -- that's larger and more frequent changes in the value of stocks and bonds. This creates a challenging environment for many investors, but we do still see a lot of opportunities in investments across stocks and bonds.

We see three key investment themes shaping the second half of this year. First, we think that central banks in developed markets are likely to keep interest rates higher for longer than they have in the past, as they struggle to bring down inflation. Central banks use high interest rates to lower consumer demand in order to reduce inflation. But lower demand also means lower economic growth. And we think this will lead to recessions in the US and Europe later this year.

Second, we are pivoting to new opportunities. But selectivity is key, so we build more targeted exposures to sectors, factors -- these are groups of companies that tend to have similar characteristics and performance -- and regions that could benefit in the current environment.

Third, we focus on harnessing mega forces, the long-term structural drivers at play in the new economic regime, such as artificial intelligence (AI), automation, and others, which have had significant momentum in markets this year. I'm now joined by Varia from our Portfolio Consulting team. She will talk to you about what these themes mean for your portfolios.

VP: Thanks Karim. Firstly, in an environment of slowing economic growth, we think it's important to stay invested in the stock market, because it's very difficult to time the rebound. At the same time, investors may invest in assets that can help boost portfolio resilience, or the potential to achieve stable returns through varied economic conditions. For this, we look to bonds issued by governments with relatively stable economies, like the US and Europe. High interest rates also mean that these bonds currently offer higher potential income for investors.

Secondly, investors may want to allocate a small part of their portfolio to express short-term or tactical views, looking for assets that may be well-positioned in the current volatile environment. For example, right now, we see an opportunity in the healthcare sector, which has become less expensive in the last year and may benefit from sustained demand post-pandemic.

Thirdly, some companies may benefit from long-term forces that are not going away, irrespective of the near-term economic dynamic. We've heard a lot about these mega forces in the news recently, like machine learning, generative AI, and the transition to a low-carbon economy. Investors may invest in companies that could benefit from these trends by adding long-term allocations to thematic funds in their portfolios. Thank you for joining, and until next time.

Turning views into action

A new economic regime is playing out, where growth and inflation are likely to fluctuate more than in the past – leading to higher market volatility (larger and more frequent changes in the value of stocks and bonds). We think selectivity across stocks and bonds is the key to accessing the new opportunities from this regime.

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