Like the two characters waiting for Godot in Samuel Beckett’s play, many market participants have been waiting for a recession in the United States, which may never come. Many experts assumed that US economic growth would be much weaker this year than it has been so far. And most of them have reaffirmed this assessment by merely postponing the anticipated recession in the US until the second half of 2023 or 2024. We continue to believe that the US economy will avoid a recession this year and take a look at the recession risks for the major economies.
In our broad-based investment strategy, we reflect uncertainty about the macroeconomic outlook, both on the growth and interest rate sides. In this environment, we maintain our Strategic Asset Allocation (SAA) across the major asset classes - equities, fixed income, alternative investments and cash. However, we see opportunities in fixed income, with an overweight in government bonds and investment-grade corporate bonds, and an underweight in high-yield bonds. In this respect, recent central bank meetings have provided some surprises, both in terms of actual decisions and the bias regarding the future path of monetary policy. We pay particular attention to the impact of US monetary policy on real interest rates and long-term yields. Both have now returned to levels last seen more than a decade ago. Therefore, government bonds - even with longer maturities - are interesting again in our view.
One area where rising real interest rates are less welcome is equities. We discuss the problem of rising yields and increased multiples in the equity markets. The markets are walking a fine line where too much good economic news pushes yields even higher, hurting equities, while at the same time signs of a recession weigh on sentiment towards risky assets. Finally, we take a closer look at the Swiss franc in our foreign exchange section. The currency has been through a period of strength, but the Swiss National Bank’s (SNB) decision to leave interest rates unchanged was a surprise. This could suggest that the franc will become more stable in the coming months, although the upside potential is limited in our view.
Global growth will continue to slow down in autumn. This is mainly due to weak growth in the US, which is the result of the Federal Reserve’s restrictive monetary policy. In the world’s largest economy, the restrictive interest rate policy is having a dampening effect on virtually all main drivers of growth - consumption, investment and government spending. This increases the likelihood that the current slowdown in the US economy will be longer lasting. Against this backgdrop, the slowdown in China is intensifying problems in the European manufacturing and export-oriented industries and increasing risks of recessionary growth dynamics across Europe.
The uncertainty on the macroeconomic side is at record levels. Economic surprises, both on the upside and the downside, have been at their highest levels for the past ten years, if we except the period of the corona pandemic. In addition, central banks’ actions are also unpredictable as illustrated by the latest meetings. In this environment, we keep our preference for our robust multi-asset portfolio and have a neutral rating for all major asset classes - equities, fixed income, alternatives and cash. In our view, however, government bonds are getting increasingly attractive and confirm our overweight in that part of fixed income, while shying away from the riskier high-yield bonds.
Having appreciated visibly in the face of rising interest rates, the US stock market now appears extremely sensitive to changes in interest rate expectations. These in turn depend on US economic momentum. An orderly economic slowdown at the end of the year, which is able to reduce interest rate expectations without fueling recession fears, could therefore be exactly what the US equity market needs. A balancing act with an outcome that is difficult to predict, which leads us to maintain a neutral view.
In the fixed income area, we continue to favor investment grade government and corporate bonds, while remaining cautious on high-yield bonds due to the unsustainably low credit risk premium. Against the backdrop of the still inverse yield curve, but also in order to keep credit risks low, we prefer securities with short maturities in the case of corporate bonds, while we tend to favour longer maturities in government bonds. This is not least due to the significant rise in real interest rates.
The Swiss franc has shown remarkable strength. Factors such as a robust economic environment and the Swiss National Bank’s comfort with its strength contributed to its impressive performance. However, as the economic landscape changes, concerns arise, particularly about how the SNB will respond to a stronger franc amid changing inflation and economic conditions. Indeed, the recent decision to hold benchmark interest rates steady was a clear indication of the change in the inflation outlook. In this respect, the future performance of the Swiss franc remains a point of interest for investors and policymakers.
In times of high uncertainty, gold is always a desirable asset to overweight. However, with real rates on the rise, there are also headwinds for the precious metal and we prefer to keep our allocation neutral. In general, we keep a neutral status for our alternative bucket across the board.