Staying on course in turbulent stock market times: our equity allocation under the microscope
Companies are still enjoying high profit margins, a result of their pricing power. But fears of a mild recession lurk around the corner. Despite a strong first quarter, the economic outlook looks dimmer. Are we bracing for harsher weather? A more defensive interpretation of the equity portfolio is emerging. Mark Van Assche, Account Manager, Private Banking & Wealth Office, discusses this topic with Antoine Ruotte, Fund Manager at KBC Asset Management.
Economy & Policy
- In Europe, economic growth is better than expected due to falling energy prices. The reopening of China's economy clearly made less of an impact on the global economy than anticipated. The situation is less favourable in the US, especially in the industrial sector, which could lead to growth slowing down in the second half of 2023.
- Recent figures clearly show that inflation has peaked and is now falling in both the US en Europe. Energy prices are low, which is positive for inflation in Europe and in the US. The US labor market appears to be normalizing. However, core inflation is falling slowly in both the US and Europe.
- Programmes such as EU-Next Generation and the Inflation Reduction Act in the US continue to be substantial and offer considerable support. Fighting inflation remains the main objective of central banks. Rate hikes ar having a significant impact on households and the economy. Further tightening remains in the pipeline both in the US and the euro area, mainly as a result of stubborn core inflation.
- Central banks expect rates to peak by mid-2023. Investors are looking forward to a pause and some are even hopeful to a first cut. On the other hand, economic signals have been less negative since early 2023, meaning that riskier bond themes merit a place in the portfolio.
- The minor banking crisis in March was quickly nipped in the fud following the decisive action taken by the central banks. The problems have clearly not been completely resolved in the US, as illustrated by JP Morgan's takover of First Republic Bank. The results for the first quarter are beating expectations. Earnings growth in the US is higher than expected and Europe is performing better too. Recent discussions on the debt ceiling in the US has caused some volatility in the stock market
What risks do we see?
- Inflation is top of our list. Core inflation remains at a high level in both and the US. That persistence is affecting the policies of central banks and, consequently, economic growth.
First-quarter results are better than expected. With the bar being set low, surprises were bound to happen. Earnings growth is higher than expected in both the US and Europe. Core inflation remains too high, meaning that further rate hikes are likely. The negative impact on future economic growth is becoming clearer, especially in the US.
Siegfried top, Senior Investment Strategist KBC Asset Management
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