In March, the US services sector finally began to show signs of slowing. This bodes well for the inflation figures due to be released this week. The current economic slowdown could also prompt the US Federal Reserve to loosen its monetary policy earlier than expected this year.
Digital assets are still gaining ground: Bitcoin has risen above the USD 30,000 mark, gaining more than 80% since the start of the year amidst investors’ widespread indifference. It is being buoyed by recent economic data, which suggest that the current round of US rate hikes will soon come to an end.
Germany’s economic data have been surprisingly strong recently, with industrial output up 2% month on month in February and industrial orders up 4.8%. Thanks in part to the slide in natural gas prices, Germany looks to have achieved positive GDP growth in the first quarter – and thus avoided a technical recession.
Europe – could this time be different?
2023 got off to a very good start in Europe, where the outlook has improved considerably thanks to the slide in gas prices and China’s reopening. Many analysts had to raise their GDP growth forecasts for 2023 when the long, severe recession that was widely expected never materialised. This naturally led to improved sentiment towards eurozone stocks after they’d been very much left by the wayside. In this auspicious climate, investors were surprised by the difficulties faced by a handful of regional US banks and Credit Suisse.
The turmoil was a reminder that we’re dealing with a combination of rising interest rates and tighter lending conditions. But even though there was a risk of another financial crisis for European banks, they’re in a very different position now than they were in 2008. First, they’re better capitalised, since regulations are much stricter in Europe than they are in the US.
Secondly, European depositors are generally more stable, meaning the region’s banks haven’t suffered major withdrawals. Thirdly, many European banks are planning to carry out share buybacks, indicating that senior managers are confident about the health of their balance sheets.
Recent economic figures have been somewhat overshadowed by the problems in the banking sector, but the latest data are once again surprisingly robust. Nevertheless, we can expect tighter lending conditions to have an impact on GDP growth, particularly since inflation is still high and there are tensions in the jobs
market. All this will make the ECB’s job extremely tricky.
We still believe European stocks are attractively priced in relative terms, even though they have outperformed since the autumn. In addition to their appealing valuations, these stocks offer higher dividend yields than the yields on bonds (despite the recent uptick in bond yields), while the opposite holds true in the US. In the light of the prevailing uncertainty and renewed worries about the economic outlook in both Europe and the US, we remain bullish on European companies that stand to benefit from China’s reopening.
Switzerland – a tough start to the year
After steadily outperforming for two years, Swiss stock market indexes struggled in the first quarter of 2023 and were even slightly outpaced by the global equity index. But as is often the case, the big picture can be misleading. It’s true that the most defensive large caps took a beating at the start of the year. Yet if Nestlé, Novartis and Roche are left out, the Swiss market is doing quite well, despite the large weighting of the finance sector, which was hit particularly hard in March.
There’s good reason for this strong performance: the domestic economy has strong fundamentals and has been able to withstand some of the pressure that has weighed on neighbouring countries’ economies. There is no recession on the cards for Switzerland – at most there’ll be a short-lived slowdown. As for inflation, it is currently under control, at less than 3%.
So it’s not surprising that Swiss corporate earnings are holding up well. China’s reopening has been good news for the luxury goods sector, and the slight uptick in the eurozone economy in the first quarter has lifted cyclical sectors more broadly, including manufacturing.
That said, small and mid caps are still where the bargains can be found. This segment is, by definition, more cyclical and growth-oriented and has been buoyed as interest rates level off. It’s also now more attractively valued in relative terms, after a catastrophic year in 2022.
We remain overweight on Swiss equities, with a preference for small and mid caps, which should continue to catch up, as they have been doing over the last few months.
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.
