Monthly Coffee Break

European equity markets continued their uptrend over the past four weeks on the back of positive economic surprises and a sharp fall in headline inflation as base effects in energy started to drag. The positive market trend was clearly driven by large caps and defensive growth sectors.

April saw positive performances for risky markets, with equities and convertible bonds outperforming, followed by high yield. Government bonds underperformed across most major markets except Japan. We also saw a recovery of subordinated and CoCo bonds to the detriment of more senior issues.

The market narrative remains very cautious and divided as to the path to follow over the next few quarters. While some investors prefer to look to the encouraging observable data points being published regarding earnings and inflation, many are hanging back, pointing to an inevitable deterioration of consumer spending and liquidity provided by banks to finance the economy.

In our economic and market scenarios, the next stage points to lower growth and gradually lower inflation in the US by the end of 2024. Consequently, lower interest rates should follow, and we keep a long duration bias in fixed income. We expect a soft landing and are buyers of Investment grade credit and Emerging market debt since the carry is attractive in this outcome. Regarding equities, we keep a neutral stance considering the limited upside potential as several uncertainties weigh on the outlook. If risks to the outlook materialise or markets become too complacent, we would stand ready to reduce exposure.

March was a challenging and volatile month, with investment sentiment going through a whole variety of shades in a single month.

In March, markets were driven by the strong performance of most asset classes, confirming a general trend year-to-date in which investors in most major asset classes have been rewarded with positive returns.

European equity markets have rebounded strongly since mid-March after the sell-off due to the collapse of Silicon Valley Bank in the United States and the financial turmoil around Crédit Suisse.

Our main scenario incorporates slow growth, both in the US and eurozone, and continues to remain the most likely.

The collapse of the Silicon Valley Bank, the 16th largest bank in the United States, triggered a shockwave through financial markets. Despite their resilience, European equity markets nevertheless also had to give away some ground in this environment. During this correction, and especially since the beginning of March, growth stocks outperformed value stocks, and large caps outperformed small caps.

During February, economic and inflation data came in slightly above expectations, which helped cool the market down. Central banks reiterated the message that the market should expect monetary policy to maintain its course until we see significant signs that inflation is abating.

Uncertainties on US and European financials have replaced the better economic growth outlook in investor’s minds. Suddenly, the improvement in activity is now mitigated by financial vulnerabilities and inflation stickiness.

In the weeks to mid-March, the dominating theme was perhaps the return of decorrelation between risky assets and rates. All G4 sovereign issuers saw falls in their 10-year yields, while major equity indices all took hits. Credit spreads also widened.

The beginning of the year provided some relief to global investors and allowed them to claw back some of the losses they suffered in the previous year.

The better outlook on the growth/inflation mix for the year ahead has quickly been incorporated by risky assets, from equities to high yield via credit markets. As the extreme investor pessimism of last October is now in the distant past, we are reducing our overall equity allocation to a more neutral stance.

European equity markets made a very strong start to the year, supported by easing inflation figures, both in the US and Europe, the surprisingly quick end to the zero-Covid policy in China and the relatively mild winter that has defused the energy crisis in Europe and thus the risk of a deep winter recession.

2023 started out on the right foot for holders of financial assets, as the overall performance of equities and bonds was positive. However, a significant part of the financial community is bedazzled by the vigour of the rebound.

European equity markets registered a significant rebound from the previous month. This was mainly driven by China’s decision to ease its zero COVID-19 policy.

Market exuberance continued in December and through the first days of January, as risky assets posted a strong performance, once again on the back of signs of weakening inflation and the hope that central banks would strike a less hawkish tone.

We have started 2023 with a preference for equities over bonds, as our investment strategy turned more constructive on attractive price levels in October.

2022 was a very challenging year for traditional asset allocations, with the active repricing of risk premiums taking centre stage.

After a slightly hesitant start, European stock markets continued their recovery from the October lows and ended November well into the green.

After a bruising first 10 months in 2022 that saw fixed income investors suffering near-record losses in most asset classes, November offered the first true relief of the year.

We end 2022 with a preference for equities over bonds, as our investment strategy became more constructive on attractive price levels at the start of the fourth quarter.

In 2022, the markets repriced risk premiums in financial assets, quickly adjusting to the inflation risk and to the interest rate hikes implemented by central banks that followed.

In October, we turned more constructive based on our analysis of the market configuration. This month, fundamental support provides further reasons to maintain this stance.