The economic environment presents challenges for investors as market expectations diverge from reality. Despite positive signs in Europe and China, stubborn inflation, deteriorating quarterly dynamics in the US and stagnant eurozone growth add to the complexity.
The US economy shows mixed indicators, with a decline in the housing market, but robust labor data and a partly improving economic outlook. The Federal Reserve Chair cautions that disinflation may take longer, and further interest rate hikes will be needed to reach long-term price stability.
The eurozone has entered a stagflation period with close to zero growth in 2023, while inflation is stubbornly high, currently at 8.5%. As a result, the ECB has signaled further rates hikes.
China’s economy grew by 3% in 2022, with a 5% GDP growth target set for 2023. Reopening may bring rapid consumption-driven recovery and inflation implications for other regions.
Conclusion: Global monetary policy tightening cycle approaches its peak, evidenced by considerably higher US short-term interest rate levels of around 5% p.a. This results in an upgrade of the entire fixed income bloc, but cautiousness is still warranted as rates are expected to remain higher for longer. We like non-cyclical US and Scandinavian short-term HY bonds, but also selective IG bonds across the spectrum. We keep our small underweight position in equities, with a preference for non-US markets, while maintaining a balanced style approach. As the outlook for equity returns is capped, an absolute return approach is preferred vs. a classic relative value mandate.