Investment Update February 2023

Delicate landing ahead

After a challenging 2022, the equity markets experienced a sharp uptick in January: global equities jumped more than 5% in euro terms. In the same period, yields continued to ease: the US 10-year sovereign yield fell from nearly 3.90% to below 3.50% at the end of the month; the German 10-year benchmark yield followed a similar trajectory, falling from 2.50% to nearly 2.20%.

Geographically speaking, this rise in equity markets was driven primarily by emerging markets (+8% in euro terms), closely followed by developed markets, with +7% for Europe and more than 5% for the United States. In terms of styles, the easing of rates enabled the “growth” represented by US technology, in particular, to regain its edge on the Value style, which had a good year in 2022 in relative terms. At present, we are seeing a market driven by an expansion of multiples, i.e. equity prices are rising while corporate earnings are not rising, all driven by lower interest rate expectations.

In addition to lower rates, the dollar lost ground and the price of oil decreased. These elements were key factors in the renewed appetite for risky assets.

It was a month full of news on the economic front. However, the major factor that attracted the markets’ attention was China’s re-opening after long months of lockdown. During this period of suspension, Chinese consumers have accumulated large amounts of savings, which should be a major growth driver for the global economy.

Against this backdrop, the global real economic growth rate published for the last quarter of the year was crucial. In the United States, annualised quarterly growth was strong at 2.9%, but the contribution of domestic demand (consumption and combined investment) was rather modest. The eurozone, for its part, narrowly avoided stagnation (+0.1%), while German quarterly growth was in the red (-0.2%) and quarterly growth in France was barely positive (+0.1%).

Furthermore, the markets found good reason to gain risk appetite: inflation continued to ease (from 7.1% to 6.5% year-on-year in the United States and from 9.2% to 8.5% in the eurozone), and wages continued to rise in the United States, but at a slower pace.

A recent IMF publication also supported investors’ optimism by slightly raising growth expectations for 2023. The IMF now expects global growth of 2.9%, i.e. 0.2% higher than in its previous publication. The main reason for this upward revision was the easing of the energy crisis in Europe, a resilient job market in the US and China’s re-opening. The report states that emerging countries, particularly China and India, should be the main contributors to global growth.

At present, the likelihood of a soft landing seems higher than a few months ago. And it is precisely this hope that is fuelling optimism on the markets. For the time being, the “disinflation” that is underway has been painless. If we take the US figures, for example, the decline from 10% inflation to 6% did not lead to a sharp economic slowdown. Will this hold true if it falls to 2%? Here, doubt and precaution are legitimate.

In short, animal spirits are encouraged by the start of a slowdown in inflation, fuelling the chances of a more gradual reduction.

Despite the prevailing optimism, there is evidence that the global economy, particularly in the US, is not entirely out of the woods.

First, leading indicators continued to show future weakness in the economy. Especially in the US, PMIs and ISMs remained aligned with recessionary levels. While real estate activity continued to fall due to the rise in mortgage rates, new order pipelines plummeted and earnings expectations were consistently revised downwards. Independent of earnings growth, corporate margins remained mostly under pressure. Generally speaking, a “profitable recession” whose scale is still uncertain could start to unfold.

The overarching argument made by proponents of a soft landing remains employment. Unemployment is still at historically low levels and job creation remains stable. That said, history is on the side of the more pessimistic analysts: it is rare for aggressive monetary tightening not to be followed by a significant rise in unemployment.

We believe that this tug-of-war between bulls and bears is not over. The probability of a hard landing is admittedly decreasing, but it is far from zero. In terms of positioning, we believe it is still prudent to remain underweight on equities, while returning to bonds aligned with market duration via the US sovereign segment and European credit. In terms of sectors, we recommend an overweight position in technology, likely to continue to benefit from the easing of yields, and energy, which can both benefit from China’s re-opening and remain a hedge for inflation and the geopolitical situation. Finally, healthcare, known for its defensive qualities, can provide downside protection during a period of decreased risk appetite, as was the case in 2022.


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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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