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Market Insights – October 3, 2022

Each week, our Investment team shares its market views with you !

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Essentials

Inflation remains stubborn in the US and the eurozone but came in lower than expected in Switzerland last month (3.3% versus the 3.6% forecast). This good news rules out the likelihood of a recession for Switzerland, whose economy remains resilient according to SECO (State Secretariat for Economic Affairs).

US stock market volatility has soared in recent weeks, hitting the highs recorded back in June. Sentiment is extremely bearish, which suggests that investors have capitulated. We are likely to see a technical rally in the short term.

Oil prices were down almost 10% in September and are now below pre-Ukraine-invasion levels. To boost prices, Opec may decide to cut output by one million barrels per day at its meeting on 5 October. It remains to be seen whether investors will at last shift their focus to the supply side and away from demand, which has weakened.

Efforts to curb inflation keep markets under pressure

The US Federal Reserve (Fed) continues to raise rates sharply. Its aim is to put the brakes on economic growth in order to ease the pressure on the country’s overheating labour market and prevent a wage-price spiral. But we still think the US economy will make a soft landing, especially given that oil prices have dropped sharply since early summer. The decline in fuel prices will help to reduce the cost of living for US households. The drop in oil prices has had a knock-on effect on consumer-price growth, and other indicators also suggest that inflation has now passed its peak in the US. This could mean that the Fed will take a break from its tightening in the first quarter of 2023.

The slowdown is affecting economies around the world. In 2022, China’s GDP growth is expected to drop to its lowest level in 30 years. But Beijing has brought in measures to shore up the country’s construction sector and has eased up on its zero-COVID approach, which should mean that China’s economy will bounce back next year. The 2023 outlook for the eurozone economy is much bleaker, however, as the region will find it hard to avoid a recession. But eurozone countries have been building up their natural gas reserves, so the contraction should be minimal, unless the coming winter is much harsher than usual. We expect the Swiss economy to once again hold up well.

The current round of monetary policy tightening has not left fixed income markets unscathed. We think US yields are now back at very attractive levels and have therefore increased our allocation to this market in our investment grids, reducing our exposure to commodities, which have outperformed this year. Stock markets have also been rattled by the more hawkish tone adopted by central bankers. Stock prices have slumped, and investors are at their most bearish since the 2008 financial crisis. For these two reasons, we would advise against selling off positions at today’s levels. The current round of monetary policy tightening is likely to end in early 2023 – at least as far as the Fed is concerned – so we should see a much more favourable market environment next year, or even before that. The US market will probably be the first to bounce back. We are therefore increasing our exposure to US equities and reducing our allocation to Japanese equities, which have held up well this year.

 

UK – the new government’s credibility is in tatters

Staying true to her campaign pledge, British Prime Minister Liz Truss announced a drastic mini-budget aimed at jump-starting the economy and curbing inflation, which, at over 10%, has dramatically driven up the cost of living. Instead of considering the positive impacts of these measures, investors focused on the massive government borrowing they would require, and the tax cuts proposed for the wealthy. The market reaction was so severe that the Bank of England had to intervene urgently to stabilise the economy. That move ran counter to the Bank’s monetary policy tightening but it did help to calm the markets. On top of that, the UK chancellor was forced to make a U-turn on his controversial tax cut. Investors are probably overly concerned about the UK’s debt levels. The country’s public finances are in better shape than those of some other European countries, so it should be able to withstand a higher debt burden. But the UK is already facing a number of other headwinds, such as the unprecedented wave of strikes and soaring inflation – like the eurozone, the UK is experiencing a surge in energy prices, and like in the US, wages are on the rise. And let’s not forget that British companies are still grappling with a Brexit-related decline in productivity. The Bank of England and the new government certainly have their work cut out. Under these circumstances, we don’t think the pound will start gaining ground while inflation expectations are still pointing upwards. Yet at the same time, the weak pound will make the many international companies listed in the UK more competitive and swell their foreign-earned income.

 

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