Luxembourg; June 8, 2023: The global economic outlook over the second half of this year will be driven by a peak in inflation starting in the US, where inflation is now moderating from a high level; a pause in central bank interest-rate hiking, again beginning in the US; and an ongoing pickup in Chinese growth, supporting the wider Asia-Pacific region. The eurozone and UK, while having averted recession, remain further from peak inflation and therefore a pause in the hiking cycle.
Those are the views of Daniele Antonucci and Nicolas Sopel, Chief Economist and Senior Macro Strategist, respectively, at Quintet Private Bank, which today highlighted its forecast for the global economy, financial markets and key asset classes over the balance of 2023 and beyond.
“From a high of 9.1% in middle of last year, US inflation is now below 5% and trending lower,” noted Antonucci. “This move past the peak means the Federal Reserve can pause its policy of aggressive rate increases, which began in March 2022, even if we do not anticipate outright rate cuts before 2024.”
While eurozone and UK inflation remain elevated by comparison, that trend is expected to moderate over the coming months, argues Quintet’s Chief Economist, who therefore expects the European Central Bank and the Bank of England to pause their hiking cycles at some point later in the year, eventually following in the Fed’s footsteps.
“More broadly, Western economies face ongoing bouts of financial instability and banking-sector stress, leading to tighter lending conditions that will limit expansion,” Antonucci said. “The East, by comparison, is accelerating. China and Japan, in particular, have more room to continue to rebound. Combined, these trends will lead to a divergence of growth and the emergence of asynchronous market cycles.”
As inflation peaks, rate hiking pauses and growth moderates, high-quality bond markets look attractive as history has shown they tend to outperform equities in such conditions, according to Sopel. “At a time when 6-month Treasury bills are yielding as much as the S&P 500, the near-term risk-reward for equities appears unfavorable relative to high-quality bonds.”
Within fixed income, Quintet’s Senior Macro Strategist expects European and UK investment-grade bonds to come under pressure as the ECB and BoE continue to raise interest rates, at least in the near term. US Treasuries and investment-grade bonds, on the other hand, appear comparatively attractive as the Fed is likely to stop hiking. Sopel remains cautious on US high-yield bonds, however, given expectations that spreads will widen as a result of stricter lending criteria, higher default rates and weakening economic conditions.
Turning to equities, Sopel said: “The late-cycle volatility we expect limits the potential upside in equity performance, and we therefore do not believe it is time to re-risk portfolios yet,” adding that more defensive, low-volatility equities are comparatively attractive given their potential to mitigate downside risk while partially capturing the upside. That principle applies to eurozone equities, which Sopel believes to be currently fairly valued. “Shares that blend the eurozone with defensive markets such as the UK and Switzerland – and simultaneously give a higher weight to defensive sectors like healthcare and consumer staples – could outperform the market if we see a spike in volatility or a downturn.”
Antonucci, in turn, stressed that equity markets in the Far East are attractively valued relative to the more expensive US market. “In Asia, inflation is subdued and China’s reopening is accelerating. Asia-Pacific equities appear attractively valued – providing exposure to the region’s powerful post-Covid reopening trends. Japanese equities, in particular, are appealing from a valuation perspective, supported by resilient corporate profitability, improving economic growth, loose monetary policy and, following structural reforms, higher standards of corporate governance.”
Quintet’s Chief Economist does not expect to see major changes to the currency outlook over the balance of the year. “As the US dollar is currently overvalued, the expected Fed pause in rate increases could lead to some USD weakness,” said Antonucci. “With the Fed pause, the real interest-rate differential between the US and the eurozone and UK should diminish. We therefore expect the euro and pound sterling to strengthen versus the dollar, though only moderately given weak domestic growth. Gold, in turn, continues to serve as a valuable strategic hedge.”
Quintet Private Bank (Europe) S.A., founded in 1949, is headquartered in Luxembourg and operates in 50 cities across Europe, staffed by 2,000 professionals. Widely recognized as a private banking leader, Quintet serves wealthy individuals and their families, as well as a broad range of institutional and professional clients, including family offices, foundations and external asset managers.
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