Europe’s earnings season got off to a mixed start, but the overall picture is now solid and reassuring. So far, around half of all companies have beaten the forecasts, while only 30% have fallen short. Like in the previous quarter, the best surprises have come from large cap value stocks (banks and commodities).
The stronger-than-expected recovery in Chinese consumer spending has lifted the domestic stock market. Tech stocks on the offshore market, however, have been pulled down by short-term profit-taking and the recent breakdown in US-China relations.
US inflation figures for January will be published on Tuesday. Consumer-price growth is expected to ease once again, with energy prices now contributing very little to inflation. A faster decline in inflation would further boost the current stock market rally.
IMF – the first upgrade of many?
After a particularly gloomy outlook in October, the International Monetary Fund (IMF) has upgraded its 2023 growth forecast for the first time. According to the IMF, the global economy has held up unexpectedly well to the consequences of the war in Ukraine, particularly in terms of rising inflation and the threat of energy shortages.
The IMF now expects global GDP growth to come in at 2.9% in 2023 – that’s 0.2 percentage point above its autumn forecast. With the economy picking up across all regions, the IMF thinks most countries will avoid recession.
EU countries are expected to see a slight increase in GDP growth, with output likely to pick up again in the second half of the year – something that was totally unexpected just a few months ago. The US economy also looks set to make a soft landing, and the IMF has raised its growth forecast to 1.4%.
Chinese growth is expected to rise to 5.2%, driven by the country’s reopening after the country’s zero-COVID policy was brought to an end. The global economy has proved to be remarkably resilient, particularly given the sharp monetary policy tightening undertaken by central banks in recent months.
The US Federal Reserve, for instance, carried out its fastest and sharpest rate hikes since the late 1970s. Back then, Fed Chair Paul Volcker quickly doubled interest rates to 20% to curb hyperinflation, triggering a severe recession. Today, the Fed has raised its benchmark rate by 4.5% and seems to have managed to rein in inflation without derailing the US economy. In the US, like in many other countries, the economy has held up well thanks mainly to the robust labour market, with job creation riding high and unemployment close to its all-time low.
Barring a major deterioration in the geopolitical situation in Eastern Europe or Asia, this could well be the first upgrade of many for the IMF.
Commodities – not all cyclical assets are equal
Commodities posted solid returns in 2022 but have now entered a consolidation phase. Unlike other risk assets, they haven’t rallied since the start of the year. Yet this flat overall performance hides some major dispersion within the asset class.
Industrial metals, like copper, have put in the best performances. Investors shunned these assets last year because of fears of an economic slowdown. But the outlook has brightened recently. China has reopened its economy, which is likely to push up demand, particularly in the property and infrastructure sectors. On top of that, the ongoing political unrest in Peru, which accounts for around 10% of global production, has hampered activity at that country’s mines. However, price movements have been quick, and we prefer to wait for more visibility.
Oil prices have taken a surprisingly different route. They should have been lifted more directly by China’s reopening than metals, since travel returns to normal more quickly than construction. What’s more, inventories are low. But despite all that, oil prices have put in a disappointing performance so far this year. Even Russia’s announcement last week that it was cutting output by 500,000 barrels per day had little effect. This is no doubt partly because fears of a natural gas shortage in Europe this winter have faded. Nevertheless, we still think that oil is an attractive way of tapping into the economic recovery.
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.
