Investment Update December 2022

Caution in the face of a surge in euphoria

Overall, November was a good month for the financial markets, with the rally on equities that began in October continuing. Global equity markets gained nearly 3% in EUR, mainly driven by Europe (+6,75%) while US equities only gained 1% for European investors, due to the drop in the USD.

On the bond market, after some difficult months due to rate hikes, investors profited from a good drop in yields. For example, US and German 10-year benchmark yields dropped from 4% to 3,60% and from 2,10% to 1,90% respectively.

Once more this year, financial markets regained some confidence, based on hopes of a possible turnaround in monetary policy.

Indeed, central banks have generally committed to fighting inflation via rate hike policies, which has led to a substantial downturn on equity markets.

In November, inflation figures, which are still very high but beginning to slow down, suggested that there might be a shift in monetary policy

In the United States, inflation dropped from 8,2% to 7,7% annualised and in the eurozone, it dropped from 10,6% to 10%. Overall, the peak in inflation will be reached in line with forecasts, and it will gradually recede over 2023. However, so-called “core” inflation, which excludes energy and food, is still standing still and showing no signs of dropping.

To top it all off, US Federal Reserve chairman Jerome Powell’s statement fuelled risk appetite on the markets. Although he stressed that the Fed’s mission to combat inflation has still not been achieved, the announcement that rate hikes will gradually slow down (which is nothing new) was what the markets remembered at the end of the month.

To fight inflation, the Fed wants to see the excesses on the job market die down. However, this is not the case at the moment. Wage growth is at more than 6%, and the resignation rate and the level of job vacancies are too high and continuing to feed wage inflation, which is passed on to business costs and consumer prices. The first signs of moderation are beginning to emerge, but for a more sustainable job market, the level of job vacancies needs to be reduced, which will go hand in hand with an increase in unemployment.

Bien qu’un éventuel pic sur l’inflation soit une excellente nouvelle pour l’économie mondiale et les marchés, ses niveaux sont encore très élevés et les déséquilibres demeurent sur le marché de l’emploi. C’est pourquoi il est essentiel de se montrer relativement attentif face à un excès d’optimisme inspiré d’une politique monétaire qui deviendrait plus clémente rapidement.

Overall, we recommend taking a cautious position with regard to equities. This bullish phase that we have been experiencing for a few weeks is being driven in particular by an expansion of multiples, which offers limited appeal in terms of the risk premium relative to the bond market.

The year of rapidly rising interest rates that is behind us leads us to suggest a more constructive view of the bond class. US Treasuries could, in particular, offer a significant diversification effect in view of the economic difficulties that are ahead, but high-quality European corporate debt also offers a very interesting risk-adjusted return (around 4%).

On a sectoral level, the energy sector is still attractive during this period of inflation and energy crises linked to the geopolitical environment. The healthcare sector is also popular because of its defensive qualities, as is the technology sector for its lower correlation to the economic cycle.

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