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Article | 20 June 2023 | Investments
Jaime Arguello
Chief Investment Officer
Sentiment over the period grew increasingly upbeat, supported by agreement in the US Senate on an increase in the US debt ceiling and the Federal Reserve (Fed) decision to pause rate hikes in June. In contrast, the Australian and Canadian central bank decisions to hike rates were reminders inflation remains a concern in developed economies. In Europe, pricing pressure and inflationary expectations have eased, but investors expect further rate rises over the summer. The yen traded at a six month low against the dollar as markets were sceptical about the Japanese central bank’s adherence to its yield curve control policy.
The S&P 500 recovered to bull market territory (+20%) by early June, despite (or because of) the narrow tech focus of the contributors, while the VIX volatility index fell to its lowest level since the start of the pandemic. In contrast, markets in Europe were more subdued as Germany entered recession. Stocks in China were rangebound over the period on mixed macro data, while in Japan indices continued rising to multi-decade highs, reinforcing its position as one of the best performing markets this year. Here, foreign investors as well as strong share buybacks and a positive earnings season have all proved supportive.
Architas view
While the Fed may have paused rate hikes following the 500 basis point increases since last year, its rhetoric remains hawkish, leaving the door open for further increases. Indeed, the market is coming to terms with US rates ‘higher for longer’ and fewer rate cuts next year. Our base case is that markets remain range bound as investors grapple between resilient near term data and forward looking indicators suggesting a slowdown.
A backdrop of tight monetary conditions coupled with poorer liquidity and lower levels of savings in the economy presents a more difficult operating environment for equities, and we do not see any region offering the scope for material outperformance. Europe seems more challenged relative to other developed markets but it has underperformed the US in recent months, which is where we see a potential cooling for the AI induced rally.
Within fixed income, we upgrade our position on US Rates to Neutral. Yields are at the upper end of their expected range, and together with the pause in the Fed’s rate rising cycle, we see less downside risk. US Treasuries also offer a good hedge should equities turn more volatile or there be a dramatic slowdown in growth. We also move our fixed income Duration to Moderate Overweight, thought this is only relevant to US dollar or global biased portfolios. Elsewhere positioning on Euro Rates, where we have a moderate underweight, remains unchanged. We also keep to moderate overweights in IG Credit and EMD.
