investment insights
A controlled emergency landing
A late cycle is taking shape as economic dynamics normalise in this year of transitions. But while activity is slowing, there’s no major sign of a recession, yet.
In the US, tighter credit is curbing demand, while strong job markets and consumer savings are supporting it. As a result the US economy is only cooling very gradually. This has major implications for the Federal Reserve, which now has to keep the pressure on the economy with high rates at least until early 2024.
In Europe, the energy shock has passed, although growth still faces headwinds because fiscal support is fading and the European Central Bank is maintaining restrictive monetary policy.
China on the other hand is on a different path. Can its uneven rebound continue given fragilities in real estate and manufacturing, and as global demand slows? We believe domestic consumption should help China achieve 5.5% growth this year.
Overall, inflation is retreating in developed economies and while there’s little risk of a hard landing, high rates will act as a brake on demand. We see this as more a relatively controlled emergency landing than a soft one.
In the next phase of the cycle, portfolio resilience is key.
That means a neutral exposure to risk assets, and a defensive bias within asset classes. We remain neutral in equities, favouring quality stocks and consumer staples for their typically better late-cycle performance.
We keep a positive bias to fixed income. Within the asset class we favour quality, expressed by an overweight in US Treasuries and investment grade credit.
In currency markets, we expect the US dollar to weaken further, especially against the Japanese yen and Swiss franc.
In commodities, we have raised our allocation to gold, and expect its price to reach USD 2,100 per ounce. Oil prices should also increase to around USD 90 per barrel, given OPEC’s production cuts and robust demand.
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