At a global level, we do not expect a recession this year, but economic growth will remain below potential. Developments across the regions are mixed. On this backdrop, we maintain our defensive investment strategy across all asset classes, but the underweight in equities is reduced by building up emerging market equities. Given that we do not expect the US Federal Reserve to cut interest rates in the second half of the year, we recommend keeping duration neutral in portfolios with a barbell strategy. Alternative assets remain attractive in the current environment and gold and hedge funds remain our preferred categories.
Western economies are still experiencing weak economic growth and inflation rates in the G7 may have peaked, but the road to the two-percent inflation target will be rocky. It is also worth noting the enormous heterogeneity across regions. Growth prospects in emerging markets, led by China, have improved in recent weeks, in contrast to the developed world. In the United States, a possible recession seems to have been avoided for the time being, although the risk remains that it may occur at a later stage.
In this weak economic environment, with price pressures remaining high, the current corporate earnings season for the first quarter is being eagerly watched. The first results are better than expected, but "less bad" is far from good. The earnings recession also seems to have been postponed for now, but the risk of a setback later in the year remains. Not all companies will do well in this difficult environment - growth below potential and inflation above the central bank’s two-percent target. Selection will therefore be a key success factor in the coming months.
The upcoming debate on the US debt ceiling could cause further turmoil in capital markets. Over the past few decades, investors have been tested several times by these political games in Washington between Democrats and Republicans. But a solution was always found at the last minute and the US government was saved from default. We are currently seeing a degree of investor indifference to this issue, but there is a risk that it will take on a life of its own in the media in the coming weeks. This could be very unsettling for the markets.
This additional issue would also pose an enormous challenge to the US central bank, which is already dedicated to fighting inflation and stabilising the financial system in the wake of the recent turmoil in the banking sector. We therefore recommend that investors take risks only very cautiously and stick to our defensive investment strategy
At a global level, we do not expect a recession this year, but economic growth will remain below potential. Developments across the regions are mixed. China has surprised to the upside following the reopening of its economy, while growth in the US is expected to be weak. Expectations for Europe have been revised upwards in recent weeks, but less bad is still not good. Price pressures in Western economies have continued to ease, but the road to the central banks’ two-percent inflation target is still rocky. The restrictive monetary policy and the growth/inflation mix do not yet justify a broad build-up of risk in portfolios. We therefore maintain our defensive investment strategy across all asset classes. We remain overweight in alternatives and bonds at the expense of equities. On the other hand, we are adding some colour by moving emerging market equities from neutral to overweight. Despite this increase, global equities remain underweighted.
A potential earnings recession in the US is not yet priced in, and we therefore maintain our underweight in US equities. By upgrading emerging market equities to overweight, we are strengthening our position in the rest of the world relative to the US. At a sector level, we deem healthcare and energy attractive, while we remain tactically underweight in technology.
Given that we do not expect the Federal Reserve to cut interest rates in the second half of the year, we recommend keeping the portfolio duration-neutral using a barbell strategy. On the one hand, with attractive bonds at the short end and, on the other hand, with long-dated government bonds due to their hedging character in a recession. We would only take on risk in the investment grade segment in a very controlled manner and maintain our underweight in high yield.
In the long term, the US dollar remains overvalued against the major currencies, even after the recent correction. In the short term, however, the US current account balance and the crisis currency status continue to favour the greenback. We therefore expect a volatile sideways trend in EUR/USD in the coming months.
Alternative investments remain attractive in the current environment and are overweighted. Within the quota, gold and hedge funds are our preferred categories. Despite the recent rally in gold above USD 2 000, the medium to long-term drivers remain intact. Positions should be built up on setbacks.