Monthly Coffee Break

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.

October offered a mixed picture following a bruising first three quarters. The Bloomberg Global Aggregate Index was down 0.55%, driven primarily by losses in US Treasuries. However, investors in some segments of the credit markets, especially EUR HY, USD HY and to a lesser extent EUR IG did see positive performance. Most Inflation-Linked Bonds markets with the exception of the US also rallied on persistently high inflation.

European equities have rebounded over the past four weeks. The rebound was mainly driven by value stocks that have outperformed growth stocks since the last Equity Committee.

Although the economy continues to decelerate, equities staged a strong rebound during the month of October.

September was another very challenging month for investors. The market is subject to considerable uncertainty, with no clear evidence of the next step.

European equities closed September lower. In Europe, the energy crisis continued to dominate the headlines, as Russia completely halted gas flows through the key Nord Stream 1 pipeline at the beginning of the month.

After registering losses in August, there was no reprieve for fixed income investors in September. All major asset classes posted negative returns, with the biggest falls coming in UK gilts.

Short-term interest rates have been rising around the world over the past year as central banks attempt to fight inflation.

While inflation continues to surprise to the upside, growth dynamics have turned and continue to decelerate. Growth concerns are mainly affecting Europe, as energy prices remain an important inflation driver, while central banks are stepping up their tightening.