Monthly Investment Outlook – April 2023

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.

“ (…) 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 or record-speed rate hikes following over a decade of artificially loose policy. ”

JONATHAN UNWIN – MONTHLY OUTLOOK

Central Bank Rates

Country	Current rate	3 Months	6 Months	9 Months	Peak
US	4.82	4.96 ↑	4.72 ↓	4.41 ↓	4.980 (May)
UK	2.88	3.29 ↑	3.49 ↑	3.48 ↑	3.514 (October)
EU	4.16	4.50 ↑	4.61 ↑	4.54 ↑	4.616 (September)
JAPAN	-0.01	-0.01 ↑	0.07 ↑	0.11 ↓	0.106 (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.