In April, financial markets continued to move in an environment strewn with pitfalls. Overall, equity and bond markets struggled and posted losses of around 3%.
On the equity markets, April was particularly busy with complications for the United States
(-4%) as the technology and communications sectors, which are sensitive to the rise in interest rates and, for some, suffering from difficulties in published earnings, were particularly affected while the European markets stagnated.
The macroeconomic environment is giving investors a hard time as the first signs of moderation in economic growth are starting to emerge and inflationary pressures provide little respite.
For example, the US and the Eurozone released their respective growth figures at the end of the first quarter of the year. The United States, the world's largest economy, disappointed expectations: its growth plunged into the red at -1,4%, compared with expectations of +1%. Having said that, looking at this figure in greater detail allows it to be put into perspective, because it is the sharp rise in imports that made the highest negative contribution to this data. In addition, the components of internal consumption and investment continue to grow, and a strong import figure reflects high domestic consumption.
In the eurozone, growth was in line with expectations, up +0,2% compared to the previous quarter, although concealing some disparities. Germany posted growth in line with expectations (+0,2% on a quarterly basis) while the French economy stagnated compared with the last quarter of last year. Domestic dynamics are somewhat different and less encouraging than in the US, as the impact of domestic consumption on growth in Germany and France has been negative. This seems to reflect the effect of rising energy costs on households’ real disposable income.
Growth figures may seem mixed, but this does not affect growth expectations that are still present for the rest of the year.
Germany posted growth in line with expectations (+0,2% on a quarterly basis) while the French economy stagnated compared with the last quarter of last year. Domestic dynamics are somewhat different and less encouraging than in the US, as the impact of domestic consumption on growth in Germany and France has been negative. This seems to reflect the effect of rising energy costs on households’ real disposable income.
China also has its share in the moderation of economic activity, with its merciless policy to combat Covid-19 dealing it a heavy blow. Currently, confidence indicators point to a slowdown in activity as a result of this fight against the pandemic. In addition, headwinds in the real estate market continue to contribute to the country's economic restlessness.
This context of moderating global economic activity is taking hold, as inflation continues to be a source of concern against which central banks are starting to deploy their arsenal. Inflation figures are close to 8% on both sides of the Atlantic and the annual increase in producer prices exceeded double digits. Central banks have entered the phase of monetary tightening, which should eventually ease inflationary pressures, but perhaps at the price of a slowing global economy.
Our allocation reflects this deteriorating macroeconomic environment and recommends remaining invested with renewed attention. We recommend a slightly underweight position on equities compared to their neutral weighting. We maintain our negative view on bonds. In geographical terms, we continue to favour the United States as the US economy continues to show good domestic momentum and seems more protected than Europe and emerging countries in the face of the Ukrainian conflict. Our sector view is countercyclical as the slowdown in economic activity will have a more severe impact on sectors that are highly dependent on the economic cycle. For this reason, we recommend reducing exposure to Industrials to increase the weighting of Utilities. In addition, we continue to favour quality sectors that can continue to grow independently of the economic cycle (Technology, Healthcare), buoyant sectors during inflationary periods (Energy) and with pricing power (Luxury). As for our bond view, it remains cautious. The asset class continues to struggle as rates rise on the basis of inflation and monetary tightening. This environment inspires us with a short duration and a mixed view on sovereign bonds.
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