Monthly Investment Outlook – April 2023
Author: Jonathan Unwin, Deputy Head of Asset Management and Advisory at Banque Havilland.
The new year rally came to a screeching halt in March with the threat of a fully blown banking crisis seeing the return of volatility to equity markets and the retreat of Treasury yields to September ’22 levels, as investors pared expectations of excess central bank monetary tightening. Arguably, the collapse of two American banks that focused on the tech sector and the subsequent, more shocking, demise of Credit Suisse are early manifestations of concerns we have expressed for some time over the effects of a year of record-speed rate hikes following over a decade of artificially loose policy.
While the prospect of a more systemic contagion within the banking and financial sector looks unlikely at this point (the aforementioned banks had idiosyncratic problems, and banks are far better capitalised than in 2008) it is surely inevitable that further shocks are to come, as heavily indebted consumers, businesses and economies are faced with far costlier credit conditions much earlier than they anticipated.
Nervous banks are now likely to lend less, thus hampering growth and denting the value of collateral banks lend against – further reducing lending. While global growth expectations are increasingly less adverse than a few weeks ago, it is difficult to find signs that either the equity market or the bond market are yet realistically pricing in the prospect of at best a stagnating period of growth, let alone a painful recession. Corporate earnings look set to be no better than 2022’s, with valuations yet to reflect this and core inflation (while declining) remains higher and stickier than central banks would like.
The chances of a Fed ‘mis-step’ one way or another looks very likely, with an early end to the tightening program potentially allowing inflation to return, while the maintenance of rates at high levels risks pushing the economy into recession. We would like to see a clearer reflection of the underlying fundamentals in the financial markets before being confident enough to add further risk to clients’ portfolios.
Stocks have held on to early gains despite the banking sector turmoil, but they appear increasingly detached from economic reality.
Selective short duration investment grade bonds look attractive and we are wary of taking too much credit risk at this point.
Gold has proven its worth as a diversifier to an investment portfolio through the recent volatility.
Central Bank Rates
|Country||Current rate||3 Months||6 Months||9 Months||Peak|
|US||4.82||4.96 ↑||4.72 ↓||4.41 ↓||4.980|
|UK||2.88||3.29 ↑||3.49 ↑||3.48 ↑||3.514|
|EU||4.16||4.50 ↑||4.61 ↑||4.54 ↑||4.616|
|JAPAN||-0.01||-0.01 ↑||0.07 ↑||0.11 ↓||0.106|
Our sub-asset class views
|EQUITIES||RRRRR||RRRRR||Despite the banking crisis and the deteriorating fundamentals most equity markets have enjoyed a strong first quarter. An earnings recession amid stickier inflation warrants caution.|
|US||RRRRR||RRRRR||Equities are being directed by rate expectations at the moment, and while the US economy looks better placed than elsewhere, its’ growth bias makes it vulnerable to earnings revisions.|
|UK||GGGGG||British stocks are still very cheap compared with other markets, and the energy/mining component of the 100 is attractive. Bleak political/economic backdrop.|
|Eurozone||GGGGG||Region is grappling with high inflation and energy prices but this has been offset by the China reopening and a mild winter. Energy and financial stocks look the best value.|
|Switzerland||GGGGG||Quality, defensive nature of the market continues to see Swiss stocks in demand, though valuations relatively rich now.|
|EM||GGGGG||We retain an allocation to emerging Asia for the long-term growth potential, with China’s reopening finally here. Most EM regions do not justify their risk premiums.|
|Japan||GEGEG||GEGEG||Attractive valuation for a developed market, with a lower yen supporting its export sector. Economy currently slowly ‘reopening’ from Covid.|
|FIXED INCOME||RRRRR||RRRRR||Yields are far more attractive than a year ago, but it is unclear whether a period of structurally higher rates and inflation is yet priced in. The far end of the curve is vulnerable to steepening.|
|Sovereign Bonds||GGGGG||US yield curve is inverted and rates remain under threat while inflation remains elevated. Recession may see some support, but not until FED expectations peak.|
|Corporate I.Grade Bonds||GGGGG||Buyers may soon come back with 5% yields for corporates looking attractive against a recessionary backdrop. US looks preferable to Europe.|
|High Yield Bonds||GGGGG||Default rates are subdued, but may rise as financing costs increase. Yields look attractive, but highly selective approach needed.|
|E.M. Bonds||GGGGG||We are generally cautious on emerging markets given looming recession fears, but our short duration approach achieves yield at acceptable risk.|
|ALTERNATIVES||GEGEG||GEGEG||We like holdings that are genuinely uncorrelated to the main asset classes.|
|Precious Metals||GEGEG||GEGEG||Gold is well supported as rate expectations peak. Remains the most compelling long-term hedge against inflation and elevated geopolitical risk.|
|Hedge Funds||GEGEG||GEGEG||GEGEG||Genuine alternative funds that behave in a different manner to traditional assets are a vital source of wealth preservation and diversification.|
|Oil/Commods||GEGEG||GEGEG||2022’s spike has receded but shifting geopolitics and green policies will offer structural upside over the longer term.|
|CURRENCIES||Dollar demand returned amid the March banking crisis, but DXY looks set to slide as the Fed nears the end of it hiking cycle and other regions’ policy makers catch up.|
|U.S. Dollar (DXY)||GGGGG||The dollar is only likely to retreat further if lower inflation trend is confirmed and FED becomes more dovish. Likely to be underpinned by relative resilience of US economy v Europe.|
|Sterling (GBP)||GGGGG||A period of political calm and a hawkish BOE are supporting the pound, with recent data better than feared. A potential higher tax regime may stifle competitiveness.|
|Euro (EUR)||GGGGG||Has rallied on ECB hike, China and sticky inflation. Economy looks vulnerable to consumer squeeze and ECB will be wary of hiking too hard in face of recession.|
|Japanese Yen (JPY)||GEGEG||GEGEG||JPY has potential to breakout when BOJ loosen curve control. Domestic economy is strengthening, but will Kuroda loosen before his successor takes over.|
|Swiss Franc (CHF)||GGGGG||CHF remains relatively steady despite CS debacle. Chances of an SNB hike unlikely now though.|
|EM||GEGEG||GEGEG||CNY will benefit from economic pick-up in China, while other EM’s will enjoy carry from and long term USD weakness.|