Investment Outlook March 2023

Stock market’s rally at the start of the year has reached the point of exhaustion: inflation stays strong, central banks continue their tightening cycle and markets corrected downwards accordingly. In addition to this, fear in financial markets spread regarding bankruptcies and take-overs of banks, both in United States and Europe.

We assess the ongoing situation with great care; thus, we tend to stay cautious about further developments of financial markets. Until we see clear economic signs that the bear market is coming to an end and central bankers are ready for the much talked about pivot, we keep our conservative stance both in equity and bond markets.

So, our message to our investors remains: don’t panic, but stay cautious.

BENDURA market views

The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.

Global Economy

Last month, central banks stuck to their promise to continue contractionary monetary policy. From the perspective of the economy, central banks did the right thing to stay strict as inflation stayed sticky also in the recent month. However, economic results have also showed growth staying strong, which leads to a situation where positive economic news means bad news for risky assets.

A toll of rising interest rates has affected banks in the United States: it led to the second and third biggest bank failures in U.S. history in the matter of days. The Silicon Valley Bank (SVB) faced a liquidity crunch as too many clients have withdrawn their deposits at the same time. To cover liquidity requirements, SVB was forced to sell a significant part of their assets, mainly U.S. government bonds. This caused massive loss of confidence in SVB but also across the banking sector as a whole. Such Signature Bank was affected hard with over $10 Billion in deposits withdrawn in one day. This lead both banks to fail,  the second and third biggest US Banks’ failures in history just in one week’s time.

Some banking turbulence is also felt in Europe. In Switzerland, the second biggest bank Credit Suisse was taken over by the rival bank UBS to calm down financial markets and stop the fear from spreading. Such a move was applauded by the regulators. Both Federal Reserve Bank (FED) in U.S. and European central Bank (ECB) welcomed the decision by the Swiss authorities to support stability in the financial markets and reiterated resilience and strong liquidity positions in their financial system. It is still too early to say how the markets will assess the merger.

Apart from banking sector, job market in U.S. and Euro zone stays strong, with a marginal increase in the unemployment rate in the U.S. to 3,6% and 6,7% in the Eurozone, which is close to a record low of 6,6% reached in October last year.

Equities

Equities’ rally that that started this year proves to be a classical Bear-Market rally. From the peak reached this February, world equities went about 7% down in March already. As investors were pricing economic rebound based on lower inflation and expectations of interest-rate cuts later this year, stronger than expected economic data and sticky inflation in US increased chances that interest rates will go higher and will stay at elevated levels longer than expected.

Eurozone stocks have profited from the bank sector outperformance early this year, which has changed drastically since the news about Silicon Valley Bank broke out in early March, leading to market panic around the global financial sector. While we are not convinced that the contagion effect is as drastic as the market volatility would suggest, we think the banking sector will not be a driver for outperformance on the short term anymore.

We remain cautious on Emerging Markets, as we wait for a more Dovish stance of the FED, which will have positive effects on refinancing activities of Emerging Market companies.

Looking at the bigger picture, we still think there is a higher downside potential for the world equities on the short term, due to a slowly worsening credit situation in US and analysts still predicting slightly higher revenues and profits for the companies this year. 

We still think it is too soon to price in a recovery in stock prices, therefore we stay underweight in equities in our portfolios.

Fixed Income

Our fixed income view changed slightly to the defensive side since the last month. Central banks in US and Europe reiterate their commitment to fight inflation and raise interest rates. With a chance of economic data slightly worsening, we might not yet have reached the peak of yields, but considering the likelihood of a coming recession, we overweight government bonds in our portfolios instead of neutral position a month ago.

As the market is experiencing the second fastest cycle of tightening in history, ratings of the High-Yield Corporate Bonds experience further downgrades. This is normally a book example of an approaching recession. Therefore we remain cautious on the Credit side and downgrade High Yield and stay neutral on Investment Grade Credit.

To sum up, we do not change to a more aggressive stance in the fixed income segment yet, apart from an upgrade of government debt.

Commodities and Currencies

Since China is the biggest consumer of various commodities bought from all over the world, there was a big hope of commodities appreciating with the reopening of China. However, it seems that the reopening of the economy mostly leads to natural rebound of consumption by private households, which is of course a great sign for the growth of Gross Domestic Product (GDP). Taking into consideration the still complicated situation in the credit market, lagging rebound in infrastructure spending and stagnant numbers of new houses being built, a pickup in commodities prices might be delayed, especially when it comes to industrial metals.

While spending of the households is slowly picking up, it also brings stimulus to oil and gas prices. A pickup of 1,5 million barrels per day, approximately 1,5% of global demand is expected, which should drive oil prices higher. Combined with a cut of production from Russia regarding price embargo from European countries, oil price should face a notable increase through the year.

As uncertainty in the market persists, USD seems to be favorable currency for the time being and in the case of an unfolding recession. Therefore, we tend to stay overweight USD.

Euro seems to be more a vulnerable currency in case of an unfolding recession, which leaves us positioned as underweight.

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