Higher for longer, act II

In our 2023 outlook, we highlighted how the "Higher for Longer" scenario would be supportive for equities in 2023. Let's examine how this scenario is unfolding and identify any necessary adjustments.

Bottom line

As we reach the midpoint of 2023, global markets have shown positive performances, with high-quality growth stocks leading the way and top big cap stocks concentrating most of the returns. Negative news has subsided, sentiment is improving, and the U.S. economy remains resilient. While inflation remains a concern, supply and demand dynamics are gradually stabilizing. Chinese equities continue to offer appealing opportunities, while Europe faces risks due to energy dependencies and the possibility of stagflation. Increasing beta through high-quality growth stocks remains a must for any portfolio.

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 to Chinese stocks and the lack of details on big government spending plans (both likely to reverse in 2H23). On the other hand, high-quality growth stocks have clearly outperformed the market, primarily driven by mega-cap stocks. As our focus is on pure players, we did not capture the full FAANG rally, which explains most of the relative underperformance of our strategies. Nevertheless, we anticipate that the trend favoring high-quality growth stocks, characterized by strong free cash flow generation despite increasing capital expenditures and sustainable sales growth, will continue and extend to mid and smaller caps. Even in the absence of new liquidity inflows into the financial system, and given investors' overall underweighting of equities, we expect a rotation between asset classes. Smaller companies starting to outperform mega caps will be the first indication of such a rotation. Historically, large caps lead at the early stages of bull phases, while mid and smaller caps end up with more significant returns at the end.

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 mentioned, increasing automation is the short-term solution, and strategies like AI & Robotics, Security & Space, and Fintech offer exposure to this trend.


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.



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