Christian Abuide, Head of Asset Allocation at Banque Lombard Odier & Cie SA outlines the firm’s Ten Investment Convictions for H2 2023.
The second half of 2023 offers a potential tipping point for the global economy. Inflation pressures are receding and risks are shifting to growth. While large economies continue to avoid recession and services look resilient, manufacturing indicators are weakening. Headline inflation is easing, but excluding energy the data is proving more stubborn. Fears of contagion in March from US regional banks have dissipated, and lending conditions tightened less than first feared.
In combination with tight labour markets and robust consumer spending, these trends give central banks space and the incentive to maintain restrictive monetary policies. Still, the end of the rate-hiking cycles nears. Central banks will keep rates high, and may even raise them further if needed, until the economic engine cools. The Federal Reserve is therefore unlikely to ease monetary policy before early 2024. We are closely watching the impact on small businesses and their employees who make up the bulk of economic production and labour. We expect that any recession in the US would be both mild and short-lived, and GDP growth of 0.9% for the full year.
In Europe, the energy shock is now past, core inflation has just started to decline, and wages continue to rise. We see the European Central Bank continuing its hiking cycle and weak economic growth of 0.7% in 2023. Meanwhile, China’s post-pandemic recovery has been slower than anticipated, and real estate vulnerabilities remain. However, inflation remains contained and consumer spending is holding up with China’s authorities maintaining their support. We see China’s economy expanding by 5.5% over 2023.
Globally, investors’ risk sentiment has been improving as inflation slows. Yet with growth also slowing, and gains in equity markets this year heavily skewed by the performance of mega-cap stocks and the technology sector, we retain a balanced investment stance and a neutral positioning in risk assets, focusing on areas with a greater safety margin, or a stronger growth outlook. This helps to balance mixed economic data and tightening credit conditions against valuations in risk assets that appear consistent with a soft economic landing. However, given the recession risks, the balance between risk and reward in equity markets does not look compelling. Costlier capital will weigh on corporate growth and earnings in the US, where we expect a decline of 8% in earnings growth over the full year in the S&P 500 index, followed by a 13% gain in 2024. In Europe, earnings should rise 13% in 2024, and by 15% in both Japan and China, following declines in 2023.
After a decade of low-to-negative interest rates, high quality fixed income again offers attractive returns. At this stage of the cycle, we like government and investment grade corporate bonds for their income and diversification properties.
Any examination of opportunities is not complete without closely monitoring the associated risks, especially in the wake of the steepest monetary tightening cycle in decades. The dangers of persistent inflation and a monetary policy mistake remain a major risk, along with tighter credit seeping into the broader economy, and high geopolitical tensions. Further, we cannot rule out a sharp decline in corporate earnings, or markets underestimating recession risks.
