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Hot time, summer in the city

With great disbelief, investors watched risk assets jump from their June lows. Against all odds, stocks staged another infamous mid-summer rally. What has changed since the panic a few weeks ago? Discover the views of our experts in this Research Weekly.

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The difference in market sentiment

Sentiment has somewhat normalised after hitting record lows, but, more importantly, perception has shifted from an inflation scare to growth concerns. Take China: the macroeconomic data is so soft that authorities scrapped the annual growth target and the central bank started slashing rates beyond market expectations. While growth concerns may not sound like good news for equities, they certainly are good news given that central banks had been seen to be in autopilot tightening mode across the board.

Moreover, quality growers are benefiting, i.e. companies outgrowing the economy with stable business models. Growth is likely becoming scarce again after the pandemic-related catch-up in many places.

So how should one manoeuvre from here onwards? Anyone who dared to buy into the panic two months ago may want to trim some of their positions going forward after the stunning performance. For those who are not market timers (usually the majority of investors), it may be better to stick to their holdings. We suggest focusing on two segments: quality growers that just confirmed their market leadership on a relative basis, and deep-value stocks, which are highly likely to realise both earnings and dividends.

What about currencies?

Currency markets have reacted to the perception shift from inflation to growth as well. The US dollar is likely to consolidate as rate fantasies wane. While a US dollar collapse would be good news for emerging market bonds (leading to capital inflows into emerging markets), given a likely consolidation in the US dollar, we maintain our preference for developed market corporate debt over emerging-market debt overall.

What’s going on with the US economy’s inflation?

US inflation has eased but inflation expectations are reported to be stickier than expected. This suggests that a couple of inflation drivers will stay for longer. Most are driven by shortages, starting with the labour market with its low participation rate, to too little affordable housing driving rents up.

At the same time, energy prices have declined in the US, which brings some relief for the short-term inflation outlook. Both developments could be observed in the latest consumer survey of the University of Michigan, which showed easing inflation expectations for 2023 and a marginal pickup of longer-term inflation expectations for the next five to ten years.

The reluctance of longer-term inflation expectations to decline will increase the pressure on the Fed to talk more hawkish about monetary policy and speculations about another a 75 basis point rate hike at the next Federal Open Market Committee meeting in September could well accelerate again. We still assume that the ongoing moderation of economic growth and overall demand will allow the Fed to reduce the pace of rate hikes to 50 basis points.

Consumer sentiment has reacted to falling price pressures and improved slightly in August according to preliminary figures. The University of Michigan’s consumer survey places particular emphasis on price trends and monitors buying conditions for goods and houses. Its report shows that the easing price pressure together with a friendlier financial market backdrop have helped to improve consumer sentiment. The alternative consumer survey by the Conference Board has been much less pessimistic as this survey put much more emphasis on the very good employment situation.

We expect that a further easing of inflation pressure and less overheating of the labour market will allow a convergence of the two US consumer sentiment surveys.

How should you position your portfolio in the view of Julius Baer's experts?

> Contact us to find out

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