The economic outlook in the industrial nations remains gloomy. Quarterly growth in the USA has halved, while both Europe and the UK have seen meagre growth of just 0.1 percent. The global trade situation is challenging too. Declining imports in Europe and the USA point to weakening domestic demand. The central banks are still facing persistently high inflation, and those in the USA, Europe and UK raised policy rates by another 0.25 percent. Our leading indicators continue to point towards a downturn. That means we’re maintaining our core scenario of a recession and remain defensively positioned. 

Momentum wanes on the financial markets

The gloomy economic outlook is having an increasing impact on the financial markets. Momentum waned on the equity markets last month. Only the Swiss and Japanese stock markets rose sharply again. At almost 20 percent, the annual return of the Japanese stock market measured in local currency is now just as good as that generated by the technology-based NASDAQ index in the USA. A major factor behind this strong performance is the Japanese central bank’s reaffirmed commitment to its ultra-expansive monetary policy. The stock market was boosted not just by these low capital market interest rates, but also by inflation, which is now rising in Japan too. High inflation rates initially lead to higher margins for companies, benefiting share prices. But they also mean consumers have to contend with higher inflation. Consumption and the stock market are therefore likely to run out of steam in the long term.

Momentum also declined on the bond markets, despite the central banks in the USA, Europe and the UK raising interest rates again. That hasn’t changed much at the long-term end of the yield curve. 10-year yields to maturity in Germany remain below 2.5 percent, while they’re fluctuating around 3.5 percent in the USA. The debate over the debt ceiling in the USA has created slight upward pressure recently, but the effect remains limited so far. Market participants now even expect policy rates to fall sharply during the second half of the year.

Opportunity to buy emerging market equities

Against the backdrop of growing recessionary concerns and persistently high inflation in the USA, the US dollar may also continue to struggle. Although the US currency recovered slightly last month, it remains overvalued on a trade-weighted basis. That means the US dollar may depreciate further. Historically, emerging market investments, in particular, have benefited from a weak US dollar. Economic growth in the emerging economies is also more promising than in the industrial nations. India and Indonesia are performing well economically. And China is stirring from its deep coronavirus-induced slumber, albeit hesitantly. After losing ground last month, emerging market equities now represent an attractive buying opportunity, so we’re increasing our emerging market equity allocation slightly.

Performance of asset classes

Our positioning – Swiss focus