Global Strategy 2Q 2023
The recent turbulence in the financial system has made an end to the cycle of interest rate hikes more likely in the near future. In addition to the economic slowdown, the key factor here will be the momentum of core inflation. We expect a sideways trend in government bond yields. On the equity market, we recommend growth stocks from the technology and healthcare sectors. In corporate bonds, we continue to favor the BB segment.
Economy: After a good performance in the 1st quarter, the US economy could weaken from the 2nd quarter. Private consumption in particular has recently been an important pillar of the economy. Falling inflation rates will reduce real income losses, but savings accumulated during the pandemic will be increasingly depleted. Thus, spending patterns should be more closely aligned with current income. Inflation should fall steadily over the year, although the momentum of core inflation is still too high, mainly due to rents. In the euro zone, domestic demand has been suffering from high inflation and higher interest rates since the 4th quarter. However, declining inflation rates combined with wage increases should support consumption in the future. However, we believe that the sharp rise in uncertainty in the global financial system has dampened the outlook for business investment. In view of the downward trend in global raw material prices, we expect inflation to fall this year.
Bonds: Due to the turmoil in the banking sector, the US Fed is signaling less monetary tightening than in February. We expect only a 25 basis point rate hike. Recent events could weaken the economy and inflation, so the yield curve across all maturities has fallen significantly recently. Yields at the short end are now too low in our view, as the Fed will not cut rates as quickly as currently expected. The ECB is also more cautious now after raising rates in March. However, if what is happening in the banking sector does not affect the expected economic data, further rate hikes can be expected. We expect two more rate hikes at 25 bp each. German yields have also fallen and returned to January levels, making them consistent with a weak economy and approaching interest rate peak.
Currencies: The global weakening environment and the turbulence in the banking system would argue in favor of safe-haven currencies. However, the Swiss franc and the US dollar are directly affected, so we expect a sideways movement in both currencies for the time being. The gold price should also benefit from negative real yields in 2Q.
Shares: We expect a moderate increase in the global stock market in a range of 0 to +5% in the 2nd quarter. The important segment of growth stocks benefits from high profitability, good growth prospects and a foreseeable end of the interest rate hike cycle. The technology, healthcare and consumer cyclical sectors should be favored.