A DECIDEDLY ATYPICAL CYCLE
The inflationary and monetary tightening brakes are on, but they are still being countered by the strong finances of households and companies, especially in the United States. Activity is conspicuously booming in services, sustaining the improvement in labour markets. In these circumstances, we are maintaining our outlook of modest growth for developed economies during the rest of the year. On the other hand, we are trimming back our forecast for the recovery of the Chinese economy, which, having reopened, is taking longer than expected to get out of the blocks.
Central banks near peak but not ready to pivot. Perhaps the more specific aspect of this cycle is the inflationary surge and record monetary policy clampdown to deal with it. Today, central banks may be close to the end of their tightening phase. But it looks premature to start easing, as markets are beginning to realise: while bond markets priced in two cuts by the end of 2023 just one month ago, now they do not expect any until 2024. Inflation should fall quickly in terms of production prices, but underlying inflation will prove a stickier proposition with labour markets still solid.
We maintain our strategic balance between equities and bonds. In equities, we are raising exposure to the US market given the resilience of the economy and the expected pause in the rate hike cycle. We are not dropping our existing regional differentiation, remaining Overweight to European and UK equities which continue to benefit form a more favourable earnings dynamic. We are reducing our position in emerging equities due to the more moderate recovery in China, and we are reducing gold, taking profits on our Overweight which has lasted several quarters.
Central banks near peak but not ready to pivot.
We continue to hold diversifiers such as high-grade government and corporate bonds, gold, and hedge funds to manage volatility and risk. With regards to government bonds, we have recently increased the duration (time to maturity) of our existing exposure to Neutral, closing out a favourable short-duration positioning now that yields have settled at an elevated level.
In accordance with the regulations in force, we inform the reader that this document is qualified as a promotional document. Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 26/05/2023, publication completion date.
In this month's episode Fahad Kamal, Chief Investment Officer, and Andrew Thompson, Head of Investment Management at SG Kleinwort Hambros, discuss markets as they stand today with a particular focus on the bond market.
What are the potential opportunities? Tune in to hear their thoughts.
