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Q3 2023

This publication aims to provide an insight into the changing economic environment and importantly, how this has impacted financial markets and investments. Our Multi-Asset Solutions team at Santander Asset Management UK share their thoughts on the market outlook and how they have adapted investment portfolios to position our clients for the road ahead.

Summary of Quarterly Perspectives content:

  • Review of the third quarter of 2023
  • Investment performance of different asset classes year to date
  • Our expert’s opinion on the investment outlook
  • How have our fund managers changed their portfolio positioning based on the outlook and our tactical asset allocation
  • Summary of the quarterly perspectives

Outlook at a glance

Reviewing the second quarter of the year

During the quarter, global markets were largely influenced by inflation data and major central banks meetings, with investors trying to anticipate whether we are close to the peak in interest rate rises.

In July, stock markets rose amid expectations that US and European interest rate hikes are nearing an end and that the global economy will grow more than previous International Monetary Fund (IMF) forecasts suggested.1 The US Federal Reserve (Fed) raised interest rates to a 22-year high in July, and the European Central Bank (ECB) followed suit by lifting rates to their joint highest level on record.2 Measures by China to accelerate economic growth and better-than-expected UK inflation data added to investor optimism.3 Towards the end of the month, the Bank of Japan (BoJ) surprised investors by signaling that it might raise interest rates in the future, marking a significant shift away from its current policy of ultra-low interest rates, which are designed to stimulate economic growth by encouraging consumers to spend rather than save.4
Despite the strong stock market performance, economic signals are mixed. A report released in late June found that consumer spending was still low in May, but other data revealing strong new home sales and durable goods (goods not for immediate consumption and able to be kept for a period of time) orders suggested the economy was stronger.3 On 30 June, the final day of the quarter, the US Supreme Court blocked a plan to erase $430 billion of student debt, a move that could have put a lot of money back into the pockets of former students and boosted consumer spending.4 

During August, shares experienced their biggest drop in eight months, and developed-nation bonds delivered negative returns on worries that interest rates would stay higher for longer.5 A late comeback towards the end of the month wasn't enough to avoid losses, given that the mood soured during the first half of the month. The Bank of England (BoE) raised interest rates to a 15-year high at the beginning of August and warned businesses and households that rates will remain elevated for at least the next two years.6 The central bank also forecasts that the UK economy will grow less than 1% over the next three years, although it won't shrink.6 This move by the BoE comes after it raised interest rates by more than expected in June in a bid to tackle inflation that has proved more stubborn than in many other major economies. Investors’ concerns grew over a strong US economy, UK wage growth, and consumer inflation expectations above the Central Bank targets, which may stall progress in the fight against rising prices.7 Fed Chair Jerome Powell stated that while progress has been made in bringing US inflation down, it is still above where policymakers feel comfortable.8

Share and bond prices fell in September as investors came to terms with the fact that interest rates are likely to stay higher for longer.9 Yields on US government bonds surged to 16-year highs after the Federal Reserve (Fed) indicated that another interest rate hike would be implemented before the end of 2023.10 The reduced appeal of shares contributed to global stock markets experiencing their biggest monthly decline – and first quarterly decline – in a year.11 The Bank of England (BoE) surprised investors by choosing to hold interest rates steady for the first time in almost two years, although they remain at a 15-year high. The central bank’s decision to pause its rate hikes has raised hopes that interest rates have peaked, although its governor, Andrew Bailey, stressed that further hikes were possible.12 The European Central Bank (ECB) took a different approach, raising interest rates this month to their highest level since the launch of the euro. However, ECB President Christine Lagarde hinted that rates may have peaked.13 The Fed also held interest rates steady, giving consumers struggling to repay loans some breathing space.14 This marked the second time this year that the central bank paused rate hikes. However, with two more meetings remaining before the end of 2023, Fed officials have indicated that they’re willing to raise rates further unless they’re confident inflation is falling sufficiently.15

Overall, it was a tough quarter for markets when compared to the first half of 2023. Investors were closely watching major central bank policies and economic data releases for signs of future market movements. Interest rates may have reached their peak, so there may be some relief for investors and borrowers for the remainder of 2023.

3rd quarter asset class performance

Inflation and interest rates

Inflation and interest rates have been dominating the financial news lately, and for good reason. Understanding these measures is crucial to making informed investment decisions, as they can help explain why your portfolio may be behaving in a certain way. The two charts below provide a view of historic and current trends in these areas, helping you to better understand what’s going on in the current economy.

Left: Headline inflation and consensus forecast. Right: Official interest rates and expectations

When interest rates go up, it becomes more expensive to borrow money, which can lead to a decrease in consumer spending and economic growth. This can cause shares and bonds to lose value and make it harder for companies to generate profits, which can ultimately hurt your investment returns. However, rising interest rates can be a powerful tool for tackling inflation. The slowdown in spending helps to reduce the upward pressure on prices that contributes to inflation. While rising interest rates may have a negative impact, it can play an important role in keeping inflation in balance.

Inflation and interest rates outlook

We believe that investor focus has now shifted away from concerns about inflation and interest rate rises to future global economic growth. In the last round of major central banks meetings, both US and UK policymakers chose to pause on further interest rate rises. Although they warned that they would be prepared to go higher if necessary, given the expectations for inflation, this is increasingly unlikely. Even though the European Central Bank (ECB) increased interest rates in September’s meeting to a joint record high, given that inflation is falling against an economic slowdown, this may indeed be their last rise. While it may appear that interest rates have peaked, policymakers warn that they will stay higher for a longer period of time because it will take time for inflation to decline to the desired 2% target. We therefore see greater risks in economic growth estimates than in those with inflation or interest rates.


The below chart demonstrates how various indexes have performed over the last year. An index is a collection of stocks that are grouped together to represent the overall performance of a particular market or sector. In this case, we’re looking at major indices from different regions around the world, such as the S&P 500 in the United States, the Nikkei 225 in Japan, the FTSE EuroFirst 300 in Europe, the FTSE 100 in the United Kingdom and the NASDAQ 100 which includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange. These indices are made up of the largest and most influential companies within a given market, and their performance can give us an idea of how well that particular economy is doing.

Share index performance over 1 year

Share outlook

Shares have performed strongly since the start of the year, especially shares situated within the NASDAQ 100 Index, pushing up share values and making some share valuations expensive. We believe the impact of rising interest rates combined with slowing economic growth provides an uncertain and challenging outlook in the short term, leading to our decision to maintain a neutral position on shares. Stock markets continued to perform well throughout much of the third quarter until a fall at the end of September. The negative impacts of higher interest rates and slowing consumer demand may not necessarily lead to a recession, especially in the US, but we believe these are significant obstacles that justify our neutral position. In contrast to the environment of recent years, where risk-free investment was penalised by low interest rates, the risk-versus-return trade-off now favours lower-risk investment options. Investors are no longer forced to increase risk and invest in shares to obtain positive returns.


The chart below demonstrates how global bond indexes have performed in the past year. Bond indexes track the performance of a group of bonds and are typically created by selecting a specific set of bonds that meet certain criteria, such as maturity dates, credit ratings, or other characteristics. There are many different types of bond indexes, including those that track government bonds, corporate bonds, municipal bonds, or bonds from a particular region or country. Just like equity indexes, bond indexes provide investors with a convenient way to track the performance of a particular segment of the market.

Bond index performance over 1 Year

Investment-grade bonds: Issued by companies considered most financially secure and least likely to default on their loans.
High-yield bonds: Issued by less stable organisations, with a higher rate of interest to compensate for the higher chance of defaulting.

Bond outlook

Bonds have become a much more attractive investment over the last couple of years. Rising interest rates in response to inflation have seen bond yields rise in line with higher rates, and as a result, bond values have fallen significantly, meaning that bonds are now priced at attractive prices with high yields. During the third quarter, yields initially fell until central banks warned of higher rates for longer, which saw yields once again rise and values fall. We have continued to move more of the cash held in portfolios into bonds to take advantage of lower valuations and higher yields. While inflation has been slower to fall than initially forecast, meaning interest rates are likely to stay higher for longer, our conviction remains that we are probably at the peak of interest rates. Our view is that it may be some time before central banks begin to consider cutting rates in the future, even in the event of a significant economic slowdown. However, investment markets tend to anticipate the future path of interest rates, which is then reflected in the change in both yields and values. The funds are holding smaller positions in cash as we have been using some of their previous cash position to buy more bonds.

Our tactical asset allocation

Our tactical asset allocation represents our views on the financial markets based on the current market conditions and our own market outlook over the coming months. The below chart demonstrates how our current positioning is either underweight, overweight or neutral when compared to a funds benchmark. Generally, an underweight position means that we think a sector will perform worse than others, so we hold less of it. Holding an overweight position means that we think a sector will perform better, so we hold more of it. A Neutral position means that we think a sector will perform similarly to others, so we will hold a similar amount as the benchmark. 


  • During the third quarter, central banks continued to raise interest rates, changing market expectations to a higher for longer outlook.
  • Inflation continues to moderate, albeit slower than policymakers would prefer, and may take much longer to reach the desired 2% target of most developed markets.
  • Shares have performed well so far this year but face a challenging and uncertain short-term outlook as slowing economic growth and both cash and bonds now offer an attractive alternative.
  • Bond yields have risen throughout this year and have reached an attractive level, given that we believe interest rates have probably now peaked.
  • We are neutral on shares given the uncertain outlook and the raised valuations.

Investing can feel complex and overwhelming, but our educational insights can help you cut through the noise. Learn more about the Principles of Investing here.

Data as at 30 September 2023. 1Reuters, 28 July 2023. 2Euronews, 27 July 2023. 3CNBC, 24 July 2023. 4S&P Japan Sovereign Bond Index, 31 July 2023. 5Associated Press, 31 August 2023. 6The Guardian, 3 August 2023. 7Bloomberg, 8 August 2023. 8CNBC, 25 August 2023. 9Reuters, 29 September 2023. 10CNBC, 20 September 2023.  11Reuters, 29 September 2023. 12The Guardian, 21 September 2023. 13The Guardian, 14 September 2023. 14Bloomberg, 29 September 2023. 15Fox Business, 20 September 2023.

Important information

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This document has been approved and issued by Santander Asset Management UK Limited.
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Opinions expressed within this document, if any, are current opinions as of the date stated and do not constitute investment or any other advice; the views are subject to change and do not necessarily reflect the views of Santander Asset Management as a whole or any part thereof. While we try and take every care over the information in this document, we cannot accept any responsibility for mistakes and missing information that may be presented.
The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Past performance is not a guide to future performance.

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