Investment strategy 3rd quarter 2023

A new cycle is in sight

TAs inflation eases, central banks are preparing to end monetary tightening.
The stabilisation of manufacturing activity, China’s recovery and the buoyant jobs market all suggest that economic conditions will improve. Stock markets should do well in that climate, especially since they are now very attractively priced.

Inflation is dropping back to more normal levels in many countries. It’s true that year-on-year consumer price growth is still above the 2% tar- get set by central banks in most industrialised countries. But early on in the supply chain, com- modity and producer prices have declined shar- ply, suggesting that disinflation will continue to work its way through to consumer prices.

This trend should reassure the major central banks and enable them – starting with the US Federal Reserve (Fed) – to soon put an end to the aggressive monetary policy tightening that has taken place over the past year. Interest rates are likely to remain stable for now, as the major central banks will be reluctant to lower rates while the jobs market remains relatively tight. These labour market tensions have been caused primarily by structural factors, such as the retirement of large numbers of baby-boomers, who have not been fully replaced byyounger workers. This transition is alrea- dy under way and is set to pick up pace between now and the mid-2030s. The current near-full employment has then prevented the global economy from slowing as much as it otherwise would have in recent months. Stable employment and rising wages are boosting consumer spending, especially in households that built up their savings during the COVID-19 pandemic. Services such as leisure activities are doing particularly well. This resilience in the services sector has helped to shore up economic growth, while the ma- nufacturing sector is having a tough time in all countries.

The eurozone recorded a sharp slowdown in growth in the first half of the year, but the US economy still looks set for a soft landing. And China should be boosted by the post-pandemic reopening of its economy, even though the property sector is still struggling. Barring a major deterioration in the geopolitical climate, we’re likely to soon see the start of a new eco- nomic cycle, after the cyclical trough reached at the start of the year. The resilient economy and expected end to monetary tightening will be a boon for equities in the months ahead. Overall, stock market valuations are at- tractive by historical standards, especially since corporate margins have been pushed up by the inflationary environment over the past year. While it’s true that investors have become much more bullish recently, which could lead to a brief consolidation, we nevertheless remain overweight on equities. The only exception is the Japanese market, which has risen shar- ply in recent months, prompting us to reduce our exposure. Stocks still offer the best upside, but there are also opportunities in bond markets, with yields everywhere close to 10-year highs. Bond valuations have re- cently improved in Europe, so we’re increasing our exposure to eurozone bonds and reducing our exposure to dollar-denominated bonds. That’s especially justified when it comes to hedging against the risk of a dollar decline: that has become particularly expensive, especially for portfolios denominated in Swiss francs and euros.

See 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 find out more, watch the replay of our webinar on 4 July 2023 about our investment strategy for the third quarter of 2023:

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