Investment Update May 2023

When spring rhymes with caution

A month of April rich in economic data has just ended, particularly with the publication of first-quarter economic growth estimates for the major economies. Not to mention the collapse of another bank, First Republic Bank, in the United States, which revived concerns that had arisen in March about the sector in particular and financial stability in general.

In the US, growth slowed: quarterly annualised growth stood at 1.1%, compared with an expected 1.9%. Nevertheless, a more detailed analysis of the components of growth reveals strong internal demand fuelled by consumption.

In Europe, growth was sluggish on a quarterly basis, gaining only 0.1% compared to the last quarter of the year, bringing annual growth to 1.3%.

Germany avoided a technical recession with zero growth and France recorded quarterly growth of 0.2%, mainly driven by the positive effects of exports and government spending, while private consumption stagnated.

The substantial rise in the equity market in the first half of the year faltered in April: global markets fell slightly during the second half of the month. This brought overall equity market performance to 5.22% for the year to date, behind the 8% peak in February.

Regional disparity continued to be significantly in favour of Europe. Indeed, the Old Continent continues to benefit from sustained optimism supported by an unexpected upturn in growth at the end of last year. This month, European markets widened the gap with US markets. In euros, Europe gained 2.64%, compared with a slightly negative performance in the US (down 0.14%) and a much more complicated situation in emerging markets (down 2.57%). All in all, performance in Europe rose to almost 12% in 2023, compared with 6% in the US (in local currency).

Rates, meanwhile, saw a period of consolidation after a volatile March. German and US 10-year yields thus stood at 2.20% and 3.40% respectively at the end of the month.

In addition, oil was a particularly volatile and struggling asset class. In spite of promising factors such as the production cuts announced by OPEC countries and the re-opening of the Chinese economy, macroeconomic fears increased. Indeed, Brent fell below USD 75 after an intra-monthly peak of USD 87 while WTI was below USD 70, close to levels seen at the beginning of 2022.

On the other hand, there is still a dichotomy between economic indicators over different horizons. As discussed above, so-called lagging indicators, such as GDP growth figures, which give the current economic temperature, suggest that the economy is still holding up thanks to solid levels of consumption, stable disposable income and resilient industrial production.

However, the leading indicators tell a very different story. Their message is clear: it will be difficult for the economy to delay campaigns for extremely aggressive rate hikes carried out by central banks worldwide. Precursory signs, such as the yield curve, confidence indicators, unemployment registration data, and building permits all point in the direction of a marked deterioration in economic activity over the next 12 months.

The tightening of lending conditions, another matter of concern since the failure of two US banks in March, represents a sword of Damocles for economic activity: in fact, in view of the deterioration in indicators, it would not be surprising if banks no longer wanted to finance the economy.

Currently, another topic is the subject of concern: the US debt ceiling. This subject has taken up a lot of ink in the financial press, while historically it is a non-event. The Republican opposition, with a slight majority in the House of Representatives, refused to sign a blank cheque to the Biden administration, which it believes should respond to the increase in the debt ceiling with a drastic cut in public spendings. The risk of potential default exists, and according to Treasury Secretary Janet Yellen, the United States is slightly closer to a potential default on its public debt following lower than expected tax receipts.

In an environment of low visibility, it is preferable to adopt a more balanced and cautious positioning with a low level of concentration. Moreover, our recommendations continue to favour a cross-asset positioning that slightly underweights equities and favours bonds. We noted that bonds could serve to soften the blow in the month preceding the fall in rates, during the period of banking stress. The current environment therefore led us to continue to overweight the asset class, especially via US government bonds.

In geographical terms, neutrality seems preferable in order to limit risk taking. While Europe is benefiting from renewed confidence, the sectoral composition of US markets and their low cyclicality make them attractive in the current macroeconomic environment.

At the sector level, the tech sector, a promising sector in 2023 that has regained momentum after suffering in 2022, is still among our preferences. Its acyclical aspect and the negative correlation with sovereign yields are strengths that we currently favour. We also appreciate the utilities sector, which benefits both from revenue growth and its highly defensive aspect. In addition, we consider it a good time to take profits on the Luxury sub-segment, which has gained more than 27% over the year to date, with individual stocks at around 40%, compared to a global market that is significantly behind.

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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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