Investment Strategy 2nd quarter 2023

This is not a rerun of 2008

There has been no shortage of financial turmoil in recent economic history. The crises of the past few decades have often been connected to the US Federal Reserve’s moves to rapidly and sharply tighten monetary policy. When the Fed reins in lending conditions, the weakest compo- nents of the financial system often come undo- ne. This usually happens in the States, as was the case in 2008, but there can be knock-on effects elsewhere – there’s no denying that US monetary policy wields significant influence globally. Emerging market economies often experience such shocks, which are seen as collateral damage to the Fed’s monetary policy decisions.

Over the past year, the US has carried out one of the biggest rounds of rate hikes in history, so it’s not surprising that some cracks have ap- peared in the financial system. Some of the most fragile financial insti- tutions have paid the price, first in the US and then in Switzerland. As in the past, these bank collapses will most likely put an end to the Fed’s tightening. Now that disinflation is well under way in the US, Jerome Powell can justifiably turn his focus to the health of the banking system – especially since commercial banks are already tightening their len- ding conditions, which will quickly start to weigh on the economy.

While US manufacturing has begun to slow this year, services have so far been holding up well. This is mainly because the labour market is robust and wages are rising, although the sharp drop in energy prices has also helped, as it has eased the pressure on consumers’ wallets. Switzerland and Europe more broadly are also experiencing this diver- ging trend in manufacturing and services. Europe is very exposed to China, the world’s second-largest economy, so it should be boosted by the uptick in growth there, where the zero-COVID policy and repeated lockdowns are gradually becoming a thing of the past.

We think that the current financial crisis will remain contained – al- though we will be paying close attention to premiums on credit default swap – and we still hope to see the global economy pick up in the se- cond half of the year. If that happens, stock market valuations will head upwards, which is why we are still relatively overweight on equities, with a preference for high-quality stocks and sectors. In addition, long-term bond yields have clearly peaked, and the outlook is current- ly bright for the fixed-income market. We think the US dollar, which has been heading downwards for several months, will continue to lose ground as its currency premium starts to erode. Unlike the Fed, central banks in Europe have not yet decided whether to keep fighting infla- tion or focus on financial stability, which means they could end up tigh- tening monetary policy more than is needed.

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. Please note that this webinar is in French. We are working on the English version, which will be available soon.

To find out more, watch the replay of our 30 March 2023 webinar on our Q1 2023 investment strategy (in French):