US consumer confidence has soared in July, with disinflation boosting purchasing power. The resilience of the US economy, coupled with very low unemployment, has created a virtuous circle that’s driving up consumer spending and should prevent an overly abrupt economic slowdown.
The RICS UK Residential Market Survey house price balance fell sharply in June, a sign that rising mortgage rates are starting to weigh on the market. House prices are likely to continue to fall due to the delayed impact of rising rates and because the Bank of England is expected to continue to hike rates.
Oil prices have risen by almost 10% over the last three weeks on the back of a weak dollar and extreme pessimism. Prices have reached key resistance levels and could soon be back at this year’s highs.
Europe : dare to look further ahead
The eurozone has officially entered a slight technical recession, dragged down primarily by Germany. And since the region’s economic readings are still trending downwards, the question now is whether the recession is set to last. The latest PMI figures – a leading economic indicator – aren’t encouraging, as they point to a marked slowdown in private-sector growth.
If we are to avoid a worst-case scenario, the services industry will have to hold firm until manufacturing picks up again. For now, the biggest challenge facing the eurozone economy stems from the considerably tighter lending conditions and the attendant substantial drop in loans to households and businesses.
The jobs market, however, is still surprisingly strong despite the worsening economic climate. This is translating into higher wages, which, coupled with a likely decrease in inflation, will boost households’ real incomes. What’s more, pent-up demand from the pandemic hasn’t been completely exhausted. The excess savings built up over that period are still there and will help to push up consumer spending, which should serve as a key driver of eurozone economic growth in the coming quarters. In the light of all these factors, we believe the recession will be shallow and short-lived, unless the ECB goes too far in its monetary tightening.
Although European stocks staged a remarkable comeback from the lows reached last October – a rally triggered when investors realised their worst-case energy scenarios wouldn’t materialise – these markets have now given up some of that outperformance. This correction undoubtedly reflects the region’s economic slowdown and the rebound in tech stocks – a sector that’s mostly absent from European indexes. As long as the momentum in the tech sector continues, European markets will struggle to take the lead. That said, the region’s valuations are on a par with those in emerging markets, and European companies still have a solid earnings outlook. We therefore believe the downside risk is limited – especially since prudent investors are again turning to Europe after witnessing the US regional banking crisis. If we base our analysis on the mean reversion theory, European stocks still have further to climb following years of relative underperformance. For now, we’re more constructive on eurozone markets than on those in the UK, where earnings growth has been disappointing and indexes are being dragged right down by value stocks, especially commodities firms.
Absence of a global recession bad news for the Swiss market
Looking at the SMI and SPI indexes since the start of 2023, it’s clear that Swiss equities are lagging well behind stocks in other developed markets. This is due to the makeup of the two indexes, which is very different from that of the S&P 500 and the Eurostoxx 50. The Swiss market’s defensive bias is a handicap in the current environment, in which investors are very bullish and there is a strong appetite for risk.
The fact that the eurozone as a whole looks set to escape a recession is bad news for the Swiss stock market, or at least for SMI stocks, which usually fare well in times of stress.
Nevertheless, the Swiss economy is doing very well out of the economic upturn in other regions. There’s no recession in sight for the Swiss economy – there never was in fact.
For once, Swiss equities are not too pricey. They have been underperforming since the start of the year, and earnings have been revised upwards. This has lowered the premium on Swiss stocks relative to global stocks.
But as the global economy recovers, it’s better to gain exposure to the Swiss market through small and mid caps, which are more cyclical and a must-have in the current environment. We therefore recommend overweighting Swiss equities, provided that exposure is diversified through vehicles that invest in small and mid caps.
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.
