How our worldview is changing

Investment Focus

The West is slowing with bouts of financial instability, while the East is accelerating. Market volatility resurfaces every now and then and a shallow recession is still likely in the US. China and Japan have more room to continue to rebound. Contrary to our initial expectations, the Eurozone and UK appear to have avoided an outright recession due to receding energy risks. This limits any market expectation for interest rate cuts in developed markets, which we think are more likely in 2024.

The global economy

A continuation of 2023’s three major shifts: peaks, pauses and pickups

At the beginning of the 2023 we were expecting three major shifts, which have come to fruition to some extent, and we expect to continue for the rest of the year:

Inflation peaks

Inflation begins to ease in the US and, with a lag, in the Eurozone and the UK, where it’s still elevated but will likely moderate.

Central banks pause

The US Federal Reserve’s latest rate increase was, in our opinion, likely their last of the year. We believe the European Central Bank and the Bank of England will follow suit but later in the year as they continue to battle elevated inflation. We don’t expect rate cuts in 2023.

China’s economy picks up

In the absence of inflationary pressures, China has room to continue to implement stimulative policy measures to support its economy.

Central banks pause monetary policy tightening as inflation slows but stays above target.

Central Bank Policy Rates

Source: In-house research, Refinitiv; note: dotted line = Quintet forecast.

China’s economic #pick-up looks set to continue

China Purchasing Managers Index

Source: In-house research, Refinitiv.

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Markets

High-quality bonds and defensive equities are attractive in a volatile late-cycle environment

As interest rates peak, growth slows and inflation eases, high-quality bond markets look attractive as history has shown they tend to outperform equities in these conditions. Even now, the risk-reward for equities is poor relative to high-quality bonds – a 6-month Treasury bill is currently yielding more than the S&P 500.

The late-cycle volatility we expect limits upsides in equity performance, and we therefore do not believe it is time to re-risk portfolios yet. Thus, low-volatility equities are more attractive as they mitigate downside risks while partially capturing the upside. In addition, as inflation is not an issue in Asia, and China’s re-opening continues, Asia-Pacific equities including Japan are also attractively valued.

High-quality bonds are attractive as interest rates peak, the pace of economic growth slows and inflation falls back.

History has shown they tend to outperform equities in these conditions.

We believe equity markets to the Far East are more attractively valued to the relatively more expensive US market.

Asia-Pacific equities including Japan also provide an exposure to post Covid re-opening trends.

We believe European and UK investment grade bonds will come under pressure as the European Central Bank and the Bank of England continue to raise interest rates a while longer.

US investment grade bonds, on the other hand, look comparatively attractive as the Fed is likely to pause its tightening cycle.

Eurozone equities look fairly valued.

However, the economic outlook calls for caution and we therefore believe more defensive minimum volatility equities – which blend the Eurozone with defensive markets such as the UK and Switzerland, and give a higher weight to defensive sectors such as health care and consumer staples – could outperform the market if we see a spike in volatility or a downturn.

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Any questions?

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Belgium

Puilaetco

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Denmark

Quintet Danmark

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Germany

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Netherlands

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United Kingdom

Brown Shipley

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