US debt ceiling talks at the forefront

• In the absence of major economic data releases this week, the market’s attention will stay on the US debt ceiling negotiations. While we still see a resolution as the most likely outcome, the ongoing stalemate in Washington is raising the risk of a deal at the eleventh hour (as was the case in 2011).  
  
  
• Back then, the last-minute agreement spurred market volatility with stock, bonds, gold and the US dollar all reacting to contradictory headlines. This is also a risk for 2023 but, if a deal is reached, its impact will likely fade away. 

• On a more positive note, last week’s US inflation data showed further sign of easing in April. Core services and the shelter component of the Consumer Price Index have been moderating and seem to be in a downtrend, which will allow both headline and core inflation (which excludes the energy and food components) to continue easing. 
  
  
• We believe this will give the US Federal Reserve (Fed) room to pause its monetary policy tightening. We think the Fed will now hold interest rates unchanged at the current level for the rest of 2023. 

• In contrast, the Bank of England, which raised the bank rate by 25 bps to 4.5% last week, looks set to hike for a while longer (just like the European Central Bank). UK inflation is still just above 10%. The latest official data show that the UK economy has been nearly stalling in the first quarter of 2023. While the recessionary impulse seems less strong than anticipated at the start of the year, weak-to-no-growth will likely weigh on inflation.

• Over the past few weeks, the markets have largely remained steady, and our flagship portfolios have maintained their year-to-date gains, ranging between 2-5% depending on their respective risk profiles: as we've seen so far in 2023, portfolios with a higher proportion of equities have demonstrated superior performance; this is due to risk assets, particularly equities, outperforming safer assets. 
  
  
• The trends we've seen for most of this year have persisted in recent weeks. Larger cap and growth-focused companies, such as those in the technology sector, continue to outperform smaller cap and value-driven equities, like those in the banking and energy sectors. Our flagship portfolios are usually more heavily invested in the former category and less in the latter, which has favourably impacted their performance. Additionally, our carefully selected equities continue to contribute positively to overall performance. 
  
  
• Looking ahead, we’re maintaining a more cautious stance in the near term, given the nature of market dynamics as economies near the final stages of the cycle, where the potential for heightened market volatility often increases. 

Our near-term strategy for flagship portfolios remains: 

• a slight underweight equity exposure and slight overweight fixed income exposure, 
• a bias towards quality investments within equities, and 
• holding more developed market government bonds than riskier bonds within fixed income.

Past performance is not a reliable indicator of future returns.