Quarterly investment letter | 2nd quarter 2023
Here’s our summary of the markets
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 United States, and stagnant eurozone growth add to the complexity.
US economic indicators are mixed, with a housing market decline alongside robust labor data and a partially improving economic outlook. The Chair of the Federal Reserve cautions that disinflation may take longer, indicating that further interest rate hikes will be needed to reach long-term price stability.
The eurozone has entered a period of stagflation, and forecasts predict near zero growth for 2023. Inflation remains stubbornly high (currently 8.5%). As a result, the ECB has signaled further rate hikes.
China’s economy grew by 3% in 2022, with a 5% GDP growth target set for 2023. Reopening may bring a rapid consumer-driven recovery but also inflation implications for other regions.
The current tightening cycle in global monetary policy appears to be approaching 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. However, caution is still warranted as we expect rates to remain higher longer. Currently, we like non-cyclical US and Scandinavian short-term high-yield bonds but also selective IG bonds across the spectrum. We are keeping our small underweight position in equities, with a preference for non-US markets, while maintaining a balanced approach. Because the outlook for equity returns is unclear, we continue to prefer an absolute return approach over a classic relative value mandate.
Be sure to review our complete 2nd quarter 2023 investment letter, which includes a more detailed look at the regional macroeconomic backdrop, market consensus forecasts, and more.
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