Investment Perspectives 2023 | Mid Year review & Outlook
Executive Summary
Risky assets thrived
After a tough 2022 for equity and fixed income assets, triggered by the rapid pace and magnitude of the hiking cycle initiated by the Fed and ECB, the first half of 2023 offered a relief with strong return of financial assets despite uninspiring level of economic activity in Germany and China. The Government and Investment Grade bonds had a reasonable start to the year while commodities suffered from economic growth concerns. Equity indices posted strong results, but return differences across sectors and stocks were particularly notable. The dispersion within equity markets became particularly accentuated during the second quarter after the markets had given back most of their initial strong performance at the start of the year due to the collapse of a few banks in February and March, reiterating the nasty bite fast rising rates can have on corporate balance sheets.
Narrow equity market participation
Concentrated portfolios exposed primarily to large technology stocks were rewarded. Only a handful of tech shares have been responsible for most of this year’s gains despite higher rates. Indeed, the seven-largest companies in the S&P 500, all tech companies, are up 86% on average year to date!! Meanwhile, the other 493 companies, in aggregate, have barely moved this year. In Europe, technology companies ASML and SAP have been joined by LVMH and L’Oréal as key contributors to the market surge explaining more than 40% of the index return.
U.S. growth resilient, Germany in recession
Early June, the World Bank revised its forecast for US growth for 2023 to 1.1% from 0.5% in January while China’s growth is expected to climb to 5.6%, compared to a 4.3% in January. The modest rebound in activity in China will primarily benefit domestic sectors, in particular services. Euro area GDP growth is now expected at 1.1% and 1.6% in 2023 and 2024 respectively. The key positive change underpinning this revision is the fall in energy prices and abating supply-chain disruptions.
Hawkish tone reiterated by the FED and ECB
The persistence of core inflation has emerged as a key risk as it could lead to more monetary tightening. However, lower energy prices have reduced headline inflation, with positive effects on demand and financial markets. The FED decided to hold rates unchanged in June, but most members agreed that at least one additional 25 basis points (bps) hike will be required by year end. In June, the ECB raised its deposit facility rate by 25 basis points (bps) to 3.5% and made it clear that further rate hikes should be expected at the next meeting in July, while in Japan the Bank of Japan remained dovish and will continue to support the fragile economic recovery despite stronger-than-expected inflation.
Commodities weak again
Commodity index recorded negative returns in Q1 and Q2, making it the worst asset class in our investment universe with -5.0% and -2.5% respectively as energy prices fell as global growth slowed, energy conservation and mild weather helped reducing energy demand, while rapid expansion of LNG capacities mitigated pressures in natural gas market. Prices of base metals eased due to weaker global demand in particular the slower-than-expected demand rebound in China. Additionally, increased metal supply has put additional pressure on prices. In precious metals, gold delivered a positive return (+5.23% in 1H).
Too few equities in risk-on
Our defensive allocation throughout 1H favoured alternative investments such as hedge funds for their ability to seize opportunities in periods of high volatility and to limit drawdowns and gold, which performs reasonably well in periods of stress and inflation. We maintain our relatively defensive allocation with a preference for alternatives at the expense of equities. Our allocation remains well diversified, which should benefit from some inevitable mean-reversion or provide some protection if markets take a turn for the worse.
Table of contents
- EXECUTIVE SUMMARY
- 2023 – HALF-YEAR: REVIEW OF OUR INVESTMENT THEMES
- 2023: ECONOMIC AND POLITICAL DEVELOPMENTS
- FIRST HALF 2023: FINANCIAL MARKETS
- SECOND-HALF 2023: ECONOMIC OUTLOOK
- ASSET CLASS VIEWS – 2023 - JUNE 2023
- SECOND-HALF 2023: INVESTMENT IMPLICATIONS – JULY ASSET ALLOCATION
- ASSET ALLOCATION GRID
