Market Insights - June 12, 2023

The S&P 500 has been testing its August 2022 highs recently – a sign that investors are becoming complacent, with sentiment indicators pointing to extreme optimism. Stock market volatility is at a three-year low, which also suggests that investors are very bullish and that a brief consolidation could be on its way.

Europe’s natural gas reserves continue to grow and, at this rate, should be full by the early autumn, something operators like to avoid so early in the season. That means liquefied natural gas prices in Europe should fall even further and remain below the levels recorded in Asia.

The eurozone economy, dragged down by Germany, has entered a technical recession after two consecutive quarters of negative growth. Inflation has eased as the economy has slowed, suggesting that the European Central Bank (ECB) will be less aggressive in its rate hikes.     

Swiss market – still highly competitive

The Swiss franc has been hovering above parity with the euro for almost a year now. In fact, the franc is now higher than it was when the Swiss National Bank (SNB) removed the currency floor in 2015. At the time, the franc was at an all-time high and economists worried that this would hurt Swiss competitiveness, potentially causing economic growth to stall. It’s true that, in the past, a strong franc has not been good for the domestic economy, which is largely export-oriented.

When prices in Swiss francs soar, local products become less attractive to the country’s foreign trading partners. So why aren’t investors more concerned about the franc’s recent record highs? The franc has appreciated every year since 2018, and that trend looks set to continue in 2023. But this doesn’t appear to be weighing on Swiss companies. The word from Switzerland’s business leaders is that their companies are now more competitive than ever. That’s because inflation is much lower in Switzerland than in other regions of the world, particularly Europe.

Swiss inflation is quickly returning to more normal levels, coming in at just 2.2% in May, whereas eurozone inflation is still close to 7%. This makes Swiss exports seem less expensive than they were last year, based on the franc’s appreciation in real terms. So despite the franc’s rise, the Swiss market is increasingly competitive.

This should continue for a few more quarters, while eurozone inflation remains higher than Swiss inflation. However, the currency situation should begin to normalise when the SNB ends its monetary policy tightening in late June. This could prompt the franc to lose ground against the euro, as the ECB will continue to raise rates. That should further increase the appeal of Swiss exports for the country’s trading partners. Switzerland’s rock-solid competitive edge is the main reason we are overweight on the country in our asset allocation.

Chinese market – a waiting game once again

Investors have again lost confidence in China. The strong gains recorded by Chinese markets in the first quarter have been all but wiped out amid growing scepticism about the country’s economic recovery.

Three years of lockdowns have taken their toll on the private sector. Consumers are still saving more than they’re spending, and growth in manufacturing output has been weaker than expected. Growth in exports has also, unsurprisingly, stalled. It was clear from the outset that the country’s economic reopening would be driven more by consumer spending than by manufacturing, given that growth in many developed economies has slowed as a result of monetary policy tightening.   However, import data, which are a better indicator of domestic economic activity, picked up in May.

The weak property sector is dragging down growth. This major driver of the economy has been slow to recover, which could lead to more political intervention. Recently, there have been signs that the Chinese authorities are easing up in certain areas, and interest rates on deposits have also been lowered. This could mean that China’s central bank is gearing up to cut interest rates and bring in more stimulus measures. Although recent macroeconomic data have been disappointing, the stock markets seem to have priced in much of the bad news already. The end of the government’s zero-COVID policy is therefore still a key turning point that shouldn’t be overlooked.

The economy might be returning to normal, but investors and consumers need a confidence boost if we’re to see a sustained stock market rebound. An uptick in confidence will require concrete stimulus from the Chinese government.