Good news that’s not as good as it looks
Macroeconomic update for March 2023
The data looks positive: A lot of new jobs have been created in the USA, consumer confidence is growing, and consumer spending has increased. However, for the markets that is not particularly good. Inflation remains high and that might force central banks to stick to their restrictive monetary policy.
We think it’s a good time to take profits from equities. We expect rate reductions in the second half-year, so we maintain our overweight in government bonds and gold.
The monthly CIO Update analyzes the current market environment and presents the backstories. Presenters are Michaela Huber, Investment Strategist, and Stefan Eppenberger, Head Multi Asset Strategy.
Why we are more defensively oriented
Following a barnstorming stock market start into 2023, in our opinion the outlook has clouded somewhat. There are three reasons for that:
- The risk of central banks becoming more restrictive again
The labor market in the USA, as well as in other western countries, remains tight. In addition, the threat of inflation still looms. Under these conditions, positive data such as more jobs and greater demand are not good news, because they could lead to central banks becoming more restrictive again. - High expectations
A “soft landing” is expected on the markets, i.e., an economic slowdown without rising unemployment. Cyclical share prices, in particular, have risen strongly. If this optimistic scenario does not materialize, prices will fall. - Improved investor sentiment
Last September, we decided to build on our overweight in equities. At the time, investor sentiment was very negative—and prices correspondingly low. As a rule, that is a good time to buy. In our case, it paid off. In contrast, now, we are more cautious.
For these three reasons, we believe now is a good time to take profits and to weight equities as neutral. We reinvest the proceeds into cash.
In contrast to many market participants, we still believe that a recession this year is likely. Yield curves remain inverted, lending standards are very strict, and companies are struggling with shrinking margins. All three factors point to a contracting economy.
If this scenario is realized, interest rate reductions are likely in the second half-year. In that case, government bonds and gold would both benefit. Which is why we maintain our overweight for both segments.
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