In this Market Update, we look back at the global financial markets in August, provide an outlook for the months ahead and explain how we adjusted our portfolios in the last rebalancing.
The most important facts in brief
- The environment of falling inflation rates and rising interest rates led to an economic slowdown.
- In recent weeks, however, the previously rather negative sentiment has brightened.
- Economic data on future US monetary policy suggest that the fight against rising prices is succeeding.
- Fears of recession have subsided and the outlook for autumn is more positive.
- Both equity and bond markets have rallied after interest rate hikes led to a correction over the past 18 months. Key interest rates peaked.
Economic situation
The latest economic data point to a possible end to key interest rate hikes, which in principle makes for optimism among investors. In addition, several IPOs are in the pipeline, both in the US and in Europe, after the financial markets were still in great turmoil six months ago due to the demise of the Silicon Valley Bank. The much-watched volatility index “VIX” has fallen to its lowest level in three years, indicating a more optimistic mood among equity investors.
The US labour market continues to grow and more people are employed than ever before, supporting household incomes and boosting consumer spending. Similarly, the European labour market is very robust and unemployment is at an all-time low.
Falling inflation poses short-term challenges, but is unlikely to trigger an “earnings recession”. This is the term used when corporate profits are below the previous year’s level for two consecutive quarters. Furthermore, US companies will benefit from a weak US dollar in the second half of the year, especially multinationals with high foreign currency sales, as the US dollar has depreciated by 7% since the end of 2022.
What does this mean for the asset classes equities and bonds?
Equities
Price-earnings ratios are slightly above the long-term average worldwide and significantly above the long-term average in the US. In the current reporting season for the second quarter of 2023, the focus is particularly on big tech companies such as Apple and Microsoft. It will become clear how companies cope in a challenging market environment and how they adapt their value chains. Special attention is paid to the company outlook not only for the second half of the year, but also for 2024.
The outlook for the third and fourth quarters is promising, especially for US companies with international business. The dollar’s year-on-year weakness will boost their revenues, as around 30% of sales (of S&P 500 companies) are generated abroad. The US dollar index is currently almost 7% lower than last year. US companies will continue to form an integral part of Everon’s portfolios.
Bonds
In recent weeks, the bond markets have reacted strongly to economic data, especially labour market and inflation figures. Among other things, these figures will determine how many interest rate hikes are expected in the coming months. Bonds with maturities of 2 to 5 years in particular experienced large fluctuations. For example, yields on 2-year US government bonds rose to 5.1% in early July on the back of strong labour market data, but fell to 4.6% shortly afterwards when US inflation data came in weaker than expected. Key interest rates peaked, which could make long-term bond yields attractive.
Where do we go from here?
In the coming weeks, the focus will be on two crucial factors.
First, how far will central banks push their monetary tightening cycle? Secondly, how have companies reacted to the macroeconomic environment, which is characterized by weak growth and increased price pressure?
Further, the euphoria around the topic of artificial intelligence led to “FOMO” (Fear Of Missing Out) among investors who are eager to participate. In this environment, regular rebalancing and active risk management are particularly important, not only in the AI and technology sector, but in general.
Global growth weakness is expected to continue into the autumn, although the US economy has been resilient so far. However, growth is slowing due to weak consumption and lower investment. The outlook for the second half of 2023 is subdued, but the likelihood of a “soft landing” (decreasing but not negative growth rates) is increasing, with a managed slowdown and a gradual easing of pressure on demand and inflation expected.
What does this mean for your Everon portfolio?
In addition to our multifactor investment approach, we offer other strategy lines that have different characteristics. The Everon Income strategy focuses on high dividend paying stocks, such as equities with high dividend yields. A more passive approach that follows global financial markets is offered in the Everon Smart Global Markets strategy. This is how we adjusted our portfolios in August:
Multi Factor
The Everon Multi Factor strategy is characterized by direct investments in equities. In the August rebalancing, we increased the number of stocks to around 70 in order to further diversify the risk. In terms of sectors, we focus on solid stocks in the industrials, technology, pharma and non-cyclical consumer goods sectors.
Income
The Everon Income strategy is characterized by increased distributions. In the equity sector, the focus is on high-dividend stocks. Here, too, we increased the number of shares in August rebalancing (to around 20-25 in Switzerland and 15-20 each in the US and Europe). In terms of sectors, we are focusing on stocks from the industrial goods, financial, non-cyclical consumer goods and real estate sectors.
