Higher for longer, act II
As we reach the halfway point of 2023, it's time to review the progress of global markets and reassess our outlook for the year.
Positive Performances and the Rise of High-Quality Growth Stocks
The first half of the year has witnessed positive performances across most of our strategies. However, Sustainable Future faced headwinds due to its exposure
China: Still Time to Add Exposure
Our recommendation to increase exposure to selected Chinese equities may have been premature due to various factors, including geopolitical tensions surrounding China-U.S. relations and the Taiwan issue, which have deterred foreign investors. However, recent developments, including our firsthand investor trip to China, have reinforced our confidence in the Chinese market. It is essential to understand that China is unlikely to take aggressive actions regarding Taiwan unless compelled to do so. Once investors grasp this crucial concept, they can recognize that China remains a resilient growth area, primarily fueled by its emphasis on domestic consumption. Furthermore, anticipated government stimulus measures in the second half of 2023 are expected to revitalize the appeal of Chinese equities, especially for domestic investors. This presents an opportunity for investors to reconsider and potentially add exposure to the Chinese market.
Europe: Facing Risks
Conversely, Europe finds itself in a more precarious situation. Its economic powerhouse, Germany, has entered a recessionary phase. At the same time, the European Central Bank (ECB) faces the challenge of combating inflation levels already higher than those in the U.S., necessitating a more aggressive and hawkish stance. An economic recession, rising interest rates, and stubbornly high inflation do not bode well for European equities.
U.S.: Leaving Negative News Behind
At the end of 2022, we believed that most of the negative news was behind us, and sentiment had reached such a low point that the upside risk outweighed the downside. The U.S. economy's resilience has epitomized economic news, and we have observed improved sentiment, albeit at relatively low levels, indicating further upside potential. The supply dynamics have normalized, with global supply chain disruptions easing, notably after the reopening of China. However, U.S. demand remains robust, particularly on the consumer side, resulting in ongoing inflationary pressures.
The "Higher for Longer" Scenario Remains in Play
In our 2023 Outlook, we discussed the possibility of the Federal Reserve (FED) adopting a "higher for longer" interest rate policy to tackle inflation. Although core inflation remains persistently high, recent indicators suggest that the FED is gradually moving towards a pause in its tightening cycle. The FED's focus on the job market's performance will be crucial in determining its future monetary policy decisions. Simultaneously, the resilience of the U.S. economy, driven by a strong job market and robust consumer spending, has translated into better-than-expected corporate earnings, boosting investor confidence and driving stock prices higher. We expect the status quo to continue for the second half of the year, with the FED unlikely to change its approach drastically. The key variable to monitor remains the job market, with factors such as the shortage of the working-age population and the drop in productivity driving forces. As previously
As we review the economic landscape in 2023, positive developments validate some of our earlier predictions. Negative news has subsided, sentiment is improving, and the U.S. economy has demonstrated resilience, translating into improved corporate earnings. Chinese equities present appealing opportunities, whereas Europe faces risks associated with energy dependencies and potential stagflation. We believe it is still time to add beta to portfolios through high-quality growth stocks, such as those our strategies invest in.
Steepening of the U.S. yield curve. An indication of improving economic conditions, should be seen as supportive of earnings growth and higher multiples.
Job market tensions easing. A softer job market would imply the FED's tightening is having an effect, reduce the risk of a second inflationary wave, and would move a FED pivot closer.
Productivity improving. Adoption of new technologies, such as generative AI, aim at improving productivity. As a result, company also improve their capability to generate earnings, and thus valuation multiples adjust upward.
U.S. inflation second wave. A renewed spike in U.S. inflation would force the FED to be way more hawkish than its actual stance, and spooking markets once again.
BoJ chasing inflation. As inflation picks up in Japan, the BoJ risks remaining behind the curve. A sharp U-turn in its policy stance would impact the Yen carry trade and reduce overall liquidity in the financial system.
Geopolitics. The tensions between the Western and Eastern blocs are still unresolved. A flare-up remains possible, with unintended consequences ensuing.
This report has been produced by the organizational unit responsible for investment research (Research unit) of atonra Partners and sent to you by the company sales representatives.
As an internationally active company, atonra Partners SA may be subject to a number of provisions in drawing up and distributing its investment research documents. These regulations include the Directives on the Independence of Financial Research issued by the Swiss Bankers Association. Although atonra Partners SA believes that the information provided in this document is based on reliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completeness of the information contained in this report.
The information contained in these publications is exclusively intended for a client base consisting of professionals or qualified investors. It is sent to you by way of information and cannot be divulged to a third party without the prior consent of atonra Partners. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such.
Past performance is not indicative or a guarantee of future results. Investment losses may occur, and investors could lose some or all of their investment. Any indices cited herein are provided only as examples of general market performance and no index is directly comparable to the past or future performance of the Certificate.
It should not be assumed that the Certificate will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between the Certificate’s returns and any index returns.
Any material provided to you is intended only for discussion purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any security and should not be relied upon by you in evaluating the merits of investing inany securities.