Monthly house view | March 2023

Macroeconomy

Global purchasing manager indexes for manufacturing improved in February, but business sentiment is more upbeat in emerging economies (due to Chinese re-opening) than in developed ones (held back by interest-rate concerns). At the same time, the US has managed to skirt recession for now. Although we still think there is a risk of a shallow recession later this year, we have revised up our full-year forecast for GDP growth in the US to 0.8% (from -0.2%) and believe the Fed will raise policy rates by 25 bps by May, after which it may hit pause. With core inflation continuing to rise in the euro area, we are pencilling 50 bps rate hikes from the European Central Bank in both March and May, with a risk of a further 25 bp rise in June. In light of recent strong data, we think the upswing in Chinese growth will be frontloaded to H1, with lingering uncertainties over housing clouding the outlook for consumer sentiment. In Japan, we do not expect the appointment of Kazuo Ueda as new Bank of Japan governor to herald an abrupt hawkish turn in the central bank’s policy.

Asset classes

Equities   Developed-market equities were mixed in February, but European equity indexes outperformed their US peers. Indeed, 4Q results show that earnings momentum in the euro area is stronger than in the US, in part because the boost to margins from rising interest rates is now feeding through into the earnings growth of euro area banks. Sector wise, things could also be looking up for the European luxury sector, thanks to the release of pent-up demand in China. Although supply chains are normalising and responding to order backlogs should protect sales in H1, valuations are relatively high for European industrials and destocking could become an issue for sales growth forecasts in some instances. The negative performance of emerging-market indexes showed enthusiasm waning for China’s re-opening. Nevertheless, we maintain our positive view of Chinese equities for now. 

Fixed income   Bond volatility has increased a notch as markets recalibrate their expectations for central banks’ terminal rates amid signs of sticky core inflation and continued economic resilience. In light of the recent rise in yields and the chance of a mild recession in the US later this year, we have moved to an overweight position on US Treasuries, finding seven-to-10 year maturities increasingly attractive. We remain neutral on core euro area government bonds, even as we expect 10-year Bund yields to end the year at 2.5% after reaching a peak of 3%. We have moved to an overweight position on euro investment-grade corporate bonds too, with attractive risk-adjusted returns to be found in short-dated maturities (1-3 years). At the same time we remain underweight noninvestment-grade bonds given significant spread tightening in both the US and Europe and the risk of an increase in default rates. 

Currencies, commodities   February saw the US dollar strengthen as markets repriced the path for US policy rates higher. However, we believe that rate re-pricing has now largely run its course and that the going will become tougher for the greenback as we expect rate and growth advantages to narrow between the US and other countries and as the US is overvalued on a long-term basis. At the same time, one cannot exclude that a renewed upsurge in global risk aversion or an even more aggressive-than-expected Fed help dollar strength go further. In commodities, we have revised down our year-end forecast for Brent oil to USD105. This is higher than current prices but below our previous forecast of USD115 to take account of chances of more subdued demand in western economies later this year. 

Asset-class views and positioning

High interest rates, numerous economic and geopolitical uncertainties and high valuations (especially in the US) mean we remain underweight equities overall. Yet we are coming around to a preference for euro area equities, where valuations are lower and earnings momentum better than in the US. Our neutral positions on UK, Swiss, Japanese and emerging Asia equities are all exceptions to our underweight position in stocks. Believing there is plenty of scope for equity volatility to pick up, we continue to make regular use of derivatives to protect portfolios and generate alpha. In fixed income, bond yields look far more attractive than a year ago. Given the steady pay-outs and reduced risk they offer, we have moved to an overweight position on US Treasuries, and have been moving further out the yield curve. We continue to favour the relatively ‘safe’ carry provided by investment-grade corporate bonds over their noninvestment-grade peers.  

Three investment themes

Revenge of the 60/40 portfolio.   We believe that negative correlations between bonds and equities will progressively re-assert themselves and that government bonds are once again coming into their own, contributing to a comeback for 60/40 portfolios. We also believe quality investment-grade bonds of low duration, especially in euro, have their place in diversified multi-asset portfolios. 

Favouring fixed-rate over floating-rate debt.   Countries where variable-rate debt is prevalent are especially vulnerable to high or rising interest rates. Stress in markets where variable-rate mortgages dominate could expose government bonds and currencies to weakness at a time of high and rising rates. We likewise prefer fixed-rate corporate debt to floating-rate bond funds. 

A Gran Riserva for private assets.   The drop in asset valuations means that initial investments (‘vintages’) made by private equity and private real-estate funds in 2023 and 2024 increase the possibility they garner attractive long-term returns.