June marked the close of a rocky second quarter on the financial markets, with the negative performance by global equities topping 6% at month-end. As a result, the quarterly performance plunged to -11% and the annual performance to -14%.
On the bond side, yields peaked in mid-June before reversing course. As an example, the yield on the US 10-year rose to 3,50% before coming back down to 3%, and the German yield fell from 1,77% to 1,33% in the second half of the month. This further decline in yields stands somewhat in contrast to the rest of the year, as over that period bond yields and equities gave up ground simultaneously.
Investors remain concerned overall: the global economy is slowing, monetary policy is tightening and inflation is hitting record highs around the world.
While leading indicators show that the economy will continue to grow in the coming months, they are far weaker than they were several months ago. Potential downward revisions to growth levels can therefore not be ruled out. Central bank activity, which consists of raising rates to combat inflation, will continue to cool off the economy. It should be noted that the fight against inflation is expected to continue despite the ongoing economic slowdown, as we are experiencing persistent inflation that has spread to the entire market basket, which is already fuelling wage inflation.
Furthermore, growth forecasts for developed economies have fallen from 4% at the beginning of the year to nearly 2% today. While this estimate still looks satisfactory, we should heed the warnings about a potential recession that could hit the global economy in 2023.
Commodities, which have been a significant source of inflation, also began to lose ground amid economic concerns. Most metals and agricultural commodities entered a bear market, correcting by 20% or more. Oil, on the other hand, remained high although Brent was heading towards the symbolic USD 100 mark.
At this stage, we maintain our cautious positioning. Beyond the deteriorating macroeconomic environment, corporate earnings are likely to disappoint during the slowdown.
We therefore maintain our underweight in equities and have increased our bond allocation through US government bonds, which will play a key role in the coming months in cushioning the economic downturn. The sector allocation also remains defensive. We maintain our positive stance on the energy, healthcare and technology sectors. At the same time, to reduce the cyclicality of the sector allocation, we have turned negative on financials and industrials while our stance on consumer staples has moved from negative to neutral.We therefore maintain our underweight in equities and have increased our bond allocation through US government bonds, which will play a key role in the coming months in cushioning the economic downturn. The sector allocation also remains defensive. We maintain our positive stance on the energy, healthcare and technology sectors. At the same time, to reduce the cyclicality of the sector allocation, we have turned negative on financials and industrials while our stance on consumer staples has moved from negative to neutral.
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