Global Strategy 3Q 2023
Economic activity and inflation have moderated, but underlying price pressures are still too high. We expect interest rate hikes in July in the US and the euro area. These could be the last rate hikes, provided broad inflationary pressures subside. We consider US government bonds to be attractively valued. In equity markets, we recommend sectors with above-average profitability. In corporate bonds, we continue to favour the BB segment.
Economy: The US economy should have continued to post solid growth in 2Q, showing resilience in a difficult environment. However, in view of sharply higher interest rates, real income losses and reduced lending, we expect the US economy to slow down. After a rapid decline in inflation, we expect a sideways movement after June until the end of the year. Underlying price pressures are proving more persistent than expected. The euro area technically slid into recession in 1Q, but there are wide variations at the country level and by sector. With the end of destocking in the course of the 2nd half of the year, positive growth impulses should gradually return from industry, while growth momentum in services could ease slightly. Inflation should continue its downward trend, mainly thanks to falling dynamics in energy and food prices. Core inflation could decline only relatively slowly, mainly due to the price dynamics in services.
Bonds: The US Fed did not raise interest rates in June. It first wants to observe the effects of past rate hikes and those of the turmoil in the banking sector in March/April. After this pause, we expect another - for the time being last - rate hike of 25 bp in July. By the end of the year, sufficient data should be available showing a weak economy and declining core inflation. As soon as the bond market recognises the end of the rate hike cycle, US Treasury yields should fall. ECB President Lagarde has already given hints about a next rate hike in July. After that, the ECB will decide based on current data. We see a number of factors arguing for a weakening of inflationary pressures during the coming months. Therefore, we do not expect another rate hike after July. German Bund yields should therefore remain sideways within the existing range in 3Q.
Currencies: Further interest rate dynamics tend to favour the euro, so we expect the USD to weaken against the euro. As soon as more clarity about the global economic development is foreseeable, the Swiss franc should also weaken against the euro. We expect gold prices to rise slightly in the third quarter.
Shares: We expect a moderate increase in the global equity market index in 3Q, with the US equity market continuing to outperform the global equity index. In the current environment, we recommend stocks from sectors with above-average profitability and good growth prospects, such as industrials, technology and healthcare.