Is the long-awaited recession around the corner?
Macroeconomic update for June 2023
A resilient US labor market and a strong consumer have so far warded off a recession in the world’s largest economy. With the US facing cracks in that protective shell, as well as tighter financial conditions and lending standards following the most aggressive interest-rate hikes in four decades, the odds of sliding into a recession this year have increased. And if history is any guide, the US Federal Reserve would react with rate cuts.
After reviewing the risks to markets, we consider our portfolios well positioned. This entails, among other things, an underweight on high-yield bonds, which would see spreads widening and default rates spiking in the event of a recession, as well as a continued overweight on emerging-market equities, which benefit from a more dynamic macroeconomic backdrop and cheap valuations.
The monthly CIO update analyzes the current market environment and delves into the economic backdrop. Dan Scott, Head of Vontobel Multi Asset, and Michaela Huber, Cross-Asset Strategist, discuss the trends.
Key Takeaways
- Signs are mounting that a recession is on its way
Cues range from the inverted yield curve to leading indicators and US chief executive officers expecting a recession – which translates into job cuts and less investments. - EM economies still offer growth in portfolios
We believe government debt and gold serve portfolios with stability, while emerging-market bonds and equities offer growth opportunities. - Monetary policy may become more accommodative towards year-end
One key risk to watch out for, though, is inflation flaring back up again.
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