Quarterly investment letter | 4th quarter 2023
Here’s our summary of the markets
The economic outlook is soft but not disastrous. The US economy demonstrates strong resilience, highlighted by robust labor market conditions and documented by a solid 2.4% annualized real GDP growth rate in Q2. There are no signs of a severe US recession.
During the quarter, the Federal Reserve raised the key interest rate range by 25 basis points, reaching a 22-year high of 5.25% to 5.50%.
Europe grapples with an economic downturn driven by higher interest rates, lower consumption, and fiscal restraint. A significant decline in business activity has arrived, whereas Germany has already entered recessionary territory.
The ECB raised rates by 25 basis points to 4.0%, marking the tenth consecutive hike.
China’s economy faces deflationary pressures, with negative CPI and PPI, weak retail sales growth, and a struggling real estate sector.
Our cautious stance with a neutral position in equities and an overweight in credit has paid off. As an imminent severe recession can be ruled out, we are maintaining our current risk positioning but are prepared to reduce the equity allocation should rates continue to rise. At current valuation levels and from a risk/return perspective, we prefer selective credit over equities. Hence, we are keeping the overweight in credit investments, focusing on loans and non-cyclical short-term HY bonds with 8-9% yields, and maintaining our neutral position in equities. In this environment, we prefer an absolute return approach to the classic relative value mandate.
We invite you to review our complete 4th quarter 2023 investment letter, which includes a more detailed look at the regional macroeconomic backdrop, market consensus forecasts, and more.
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