Investment Update April 2023

End of the cycle in sight

The financial markets had a complicated month in March, which saw banking panic linked to the insolvency of Silicon Valley Bank and the acquisition of Credit Suisse by its rival UBS. This episode was accompanied by volatility on the markets, with equities losing nearly 5% in the first half of the month and bond yields substantially mirroring this over the period. Once the shocks passed and confidence was restored thanks to the various measures taken by the authorities, the equity markets were able to recover.

Over the month as a whole, the global equity market posted a positive performance of nearly 3% in dollars, although translated into euros this performance was just 0,6%. The euro continued to strengthen against the dollar, by more than 2% over the month, particularly as the interest rate differential between the two regions fell significantly in favour of Europe.

For this reason, while US-based investors were able to take advantage of the equity market rally in the second half of the month, European investors were penalised by the currency effect.

From a geographical viewpoint, the equity markets were driven more by the US, especially through Technology.

In terms of sovereign yields, the movements were noteworthy in the US: short-term 2-year yields fell drastically, losing nearly 100 basis points from the March peak, and 10-year yields lost more than 50 basis points compared to the March peak. In Germany, rates, both short and long, also declined, although to a lesser extent than US debt and the rebound was more significant at the end of the period. These movements reflect significant risk aversion among investors, who favoured segments known for being "safer".

The banking panics that rattled the markets were undoubtedly the key elements in March. The main reason for this episode of stress is undoubtedly the aggressive rise in key rates by central banks. They made some impressive communication efforts at the beginning of the year to get the market to accept that rates would remain high for a long time, the context meaning that the bond market is once again expecting a rate cut in the US during the second half of the year and the ECB to put an end to its campaign of raising rates once 3,5% has been reached, versus an expectation of 4% one month ago.

As such, bond market participants seem to doubt central banks' ability to raise rates more aggressively in this fragile environment in which economic conditions could deteriorate in the second half of the year. Many analysts and even central bankers have pointed out that this moment of hesitation could pose an aversion to risk that would prompt banks to lend less while further tightening their lending conditions.

This would set the stage for another tightening of financial conditions and would be equivalent to further rate hikes.

Ultimately, views on the market are split between an economy continuing to hold up in the short term and leading indicators in decline, pointing to future economic difficulties. These include the inversion of yield curves and the spread between 3-month and 10-year yields in particular, which are reaching record levels in the US.

Generally, we believe the current environment is typical of the end of a cycle. This is why we still recommend a cautious allocation that continues to underweight equities and overweight bonds. In terms of sectors, we believe that Technology and Luxury can bring quality to a portfolio. We are down from "Positive" to "Neutral" on the Finance sector given the fears seen in the banking sector. In addition, the Energy sector, which has long benefited from inflationary pressures, has made way in our allocation for Utilities, a much more defensive sector. On the bond front, we believe it is good to be exposed to US sovereign bonds, which provide diversification during periods of stress and become more interesting as the end of the rate hike campaign approaches.

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The recommendations contained in this document are, unless otherwise expressly stated, those of Spuerkeess Asset Management (trading name of BCEE Asset Management S.A.) and are produced by Xavier Hannaerts, Head of Investments & Conducting Officer, Aykut Efe, Economist & Strategist, Boris Stammbach, Portfolio Manager, Loïc Chaulacel, Portfolio Manager, and Enrico D’amicis, Portfolio Manager, acting under an employment contract with Spuerkeess Asset Management.

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