Monthly Investment Outlook – June 2023

Despite the collapse of another US bank (First Republic) and increasing consensus expectations of a recession, equity markets have remained fairly resilient, albeit most of the gains in both US and European stocks being accounted for by a handful of companies. In Europe it has been the luxury goods giants that have dragged markets up, as they enjoy a mini-boom due to the reopening of the Chinese economy in early 2023, while in America it is a familiar group of mega-tech stocks that have bounced following last year’s inflation-driven rout.

Earnings season has allowed stock-market operators to focus on company-specific fundamentals while monetary-policy expectations have been broadly stable since mid- April, leading to fairly direction-less markets over the past month. This could soon end, however, as the anticipated ‘final’ Fed hike happens, and the markets are forced to face the reality of a potentially extended period of rates above 5%, and the fact that while ostensibly corporate earnings have been reasonable in terms of analysts expectations (low expectations) it is in fact another quarter of lower results in real terms, i.e. an earnings recession.

Inflation remains stubborn on both sides of the Atlantic and is even showing itself in Japan, and the bond markets are more than aware of this, (even if equities aren’t), as following the brief support Treasuries received during the banking mini-crisis the yield curve now looks very similar to how it did at the start of the year.

Elevated front-end yields suggest markets believe there will be rate cuts sooner than the Federal Reserve is indicating and this contradiction usually involves some turmoil as the two have to reconcile at some point. Of course, it is possible that the US may avoid a recession and some of the data has been improving, however, we feel that there are enough indicators suggesting otherwise that caution across all asset classes is sensible for now.

“ Earnings season has allowed stock-market operators to focus on company-specific fundamentals while monetary-policy expectations have been broadly stable since mid- April, leading to fairly direction-less markets over the past month. ”

JONATHAN UNWIN – MONTHLY OUTLOOK

Central Bank Rates

Country	Current rate	3 Months	6 Months	9 Months	Peak
US	5.08	5.09 ↑	4.77 ↓	4.33 ↑	5.14 (June)
EU	3.15	3.56 ↑	3.67 ↑	3.54 ↑	3.67 (September)
UK	4.43	4.76 ↑	4.85 ↓	4.73 ↑	4.86 (September)
JAPAN	-0.03	-0.02 ↓	0.01 ↓	0.03 ↓	0.03 (December)

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.