The storm clouds are clearing
The year 2022 will be remembered not only for the geopolitical tensions that led to the outbreak of war in Ukraine, but also for the upsurge in inflation. Central bankers were forced to rein in lending, having realised a little too late that the price surge wouldn’t be as transitory as they had initially thought. This, in turn, pushed interest rates up sharply, reignited fears of a hard landing for the global economy and sent most asset classes tumbling.
To avoid a second misstep, policy makers at the world’s main central banks are keeping their feet firmly on the brakes for the time being. But there’s likely to be a pause in the current series of rate hikes soon. We expect the US Federal Reserve (Fed) – and possibly the Swiss National Bank (SNB) – to announce just that in the coming months, and other central banks, like the European Central Bank (ECB), should follow suit, probably in the second half of the year. Disinflation is now widespread in the US, and it looks like inflation has peaked in Europe too. So 2023 looks set to be a year of transition: economic growth in some regions could stall or even contract slightly, but we might also see the start of a new economic cycle. The outlook is therefore much brighter than it was a few months ago, and a soft landing for the global economy seems more likely. There are two main reasons for this: first, energy prices are falling – particularly gas prices, which have plunged in Europe – and this has eased inflationary pressures and brought some relief for households and companies; and second, China has dropped its zero-COVID policy and reopened its economy, which should boost output in the world’s second largest economy.
This should revive investors’ confidence in the financial markets, although there is still a great deal of uncertainty, and volatility is riding high. Most asset classes are attractively valued at present. Bonds yields are the highest they’ve been for some time. We think equities are broadly undervalued and very likely to rebound after a tough year in 2022. We therefore recommend increasing exposure to European and Asian stocks in portfolios. It’s a good time to buy European bonds and lengthen duration in order to take advantage of the coming decline in interest rates. For Swiss investors, we think the time is right to move back into real estate funds after a tough year for this asset class. However, we are reducing our allocation to alternative funds, which outperformed significantly last year. Lastly, the US dollar could be weakened by the Fed’s moves, particularly against the euro, which will continue to be boosted by the ECB’s efforts to curb inflation. We are therefore increasing our exposure to the single currency and reducing our exposure to the US dollar, including in Swiss franc portfolios.
Find the full analysis of the economic and market situation in our investment strategy as well as an update from our CIO, Daniel Varela, in this short video (in french) :
To go further, watch the replay of our webinar of 19 January 2023 about our investment strategy for the first quarter of 2023. Please note that this webinar is in French. We are working on the English version, which will be available soon.
Replay webinaire « Stratégie & point sur les marchés » du 19 janvier 2023
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Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
