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Article | 21 April 2023 | Investments
Jaime Arguello
Chief Investment Officer
The dilemma facing central banks, between tightening monetary policy and maintaining financial stability, was made clear by minutes from their March meetings, at which both the US Federal Reserve (Fed) and the European Central Bank (ECB) had raised rates by 25 basis points. The extent to which credit conditions have become more restrictive, particularly in the US, since the banking crisis is not yet clear. Meanwhile, headline inflation data has fallen back, although core inflation is proving more sticky. The International Monetary Fund forecast global growth to average 3% over the next five years, the weakest level since 1990, citing increasing economic fragmentation and growing geopolitical tensions.
Global equity markets rebounded after weakness in the banking sector, where some smaller players remained under pressure. High growth tech companies performed well, as expectations of more aggressive interest rate policy faded. Global bond yields slipped back from late February highs, and prices rose, on renewed demand for safe haven assets during the crisis period among the banks. The US dollar enjoyed a brief flurry of interest, given its safe haven credentials, while the price of gold also jumped, topping $2,000 per ounce in early April. The oil price moved up towards year highs, after OPEC+ announced surprise production cuts.
Architas view
Following recent market rebounds, we are seeking to take profits on some of our short term active views. We recently felt that concerns relating to the wider US and global banking sectors were overdone and that price dislocations from these negative market movements had created opportunities. Given strong market gains since mid March, however, we now feel much of the technical rebound has played out, with markets now back to their year-to-date highs.
Regarding equity markets, we maintain our positive view on Asia ex Japan/Emerging Markets, where we look for an improving economic backdrop. There are increasing signs of better economic activity and exports and we maintain our conviction that the region’s equity markets will be rewarded in due course.
With regard to fixed income, our view earlier this year was that bond yields would likely trade within a range, as we neared the end of the current rate rising cycle. However, having witnessed some dramatic falls in yields in early March, as bond prices rose, we felt this reaction had been overdone and became more negative on longer term bonds. With yields now back towards the middle of their expected near term range, we have adopted a more neutral stance.
To facilitate this, we have again become more positive on investment grade credit, an asset class where attractive levels of yield remain on offer. We also maintain our positive view on emerging market debt, given the approaching end of the US rate rising cycle, the weakening trend for the US dollar and their relatively high yield levels.
