After a strong performance in January (+5% in euros), equity markets returned to a lull in February, closing in slightly negative territory (-0,5%).
This performance concealed a fairly marked regional disparity, with Europe still in the lead (+2%) while the US markets lost ground, ending the month slightly in the red. Emboldened in recent months by the reopening of China and the relative recovery in economic figures, it was mainly emerging markets that were affected by the return to caution that caused a negative performance below -6%.
Overall, economic activity continued to hold up despite a number of rather sluggish leading indicators and the wave of rate hikes in 2022.
At the same time, yields returned to higher levels, offsetting declines from the beginning of the year due to stronger inflation and resilient economic activity in the short term.
This winter, Europe avoided the worst in terms of the energy crisis and the endless lockdown in China. Moreover, China and its trade partners, including Europe, are now fully benefiting from its reopening. Thus, after growth expectations were revised downwards for several months last year, optimism is inching its way back. Recession scenarios which were plausible up until a few weeks ago have been postponed.
That said, the impact of rate hikes on economic activity is not immediate and we should not overlook the fact that they are widespread. Despite the prevailing optimism, the economic impact of these rate hikes should weigh on business activity this year.
The main economic indicators illustrate this resilience perfectly. In the US, the ISM index shows that manufacturing activity is slowing at a reduced pace, and this is also visible in new orders. In Europe, the composite PMI is once again in positive territory and figures in China reflect the optimism linked to the reopening.
Is the re-acceleration of the economy compatible with the central banks' ambitions to bring inflation back down to their 2% target? This is highly doubtful. Inflation figures published over the past month have generally exceeded analysts' expectations, both in the United States (6,4% vs. 6,2%) and in Europe (8,5% vs. 8,3%).
Moreover, core inflation remains high and shows no signs of turning around. With this in mind, we feel the path to 2% inflation will likely be more bumpy than many analysts might expect.
First and foremost, if the acceleration in economic activity is maintained and increases, inflation expectations will likely move even further away from the 2% target.
Consequently, if economic activity is still holding up, we should not expect a sharp rebound either, as interest rates could stay at restrictive levels for several more months.
In an environment where the inflation and growth trend is still uncertain, we continue to recommend a cautious stance on equities with a slight underweight. Geographically, the preferred mix is positive on the US and neutral on Europe and emerging economies. From a sectoral perspective, it seems to be a good idea to incorporate quality cyclicality as long as the economy and profit margins hold up. As such, our recommend is to do so by overweighting finance as opposed to health, which we recommend be moved to a neutral weighting. We still believe it's beneficial to overweight the energy, technology, finance and luxury sectors.
We maintain a positive view on bonds, but only via US government bonds and investment grade credit – which are likely to perform well in times of economic turmoil and take advantage of the carry effect – while remaining cautious on duration.
Disclaimer
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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