The Inbetweeners Market
Summary
- The current rate and business cycle is coming to an end, but it is too early to place bets on the new cycle.
- Performance concentration of a narrow group of mega caps has been at an extreme this year.
- There is strong evidence that the US might face much lower real growth over the next few quarters.
- The Chinese economy is not in a healthy state and requires targeted support – likely more volatility ahead.
- Focusing on areas with a favourable risk/reward remains critical as does stringent risk management.
Markets have been challenging over the last few months. It started with the banking crisis, which came – as crises have it – unexpectedly, leading to a very bifurcated market that was driven by a very narrow set of companies.
Year-to-date, five names are responsible for over 90% of gains in the S&P500 and seven names for all gains – and all of them are technology companies.
It seems investors have decided to bypass the uncertainties over the economic outlook, interest rates and inflation and buy what has worked in the past and what has so far proven to be unassailable.
Investing in stocks that exhibit relative strength is a powerful strategy and, fundamentally, some of the stocks in that group are attractive. However, there are also reasons for concern.
Exhibit 1: Performance of different asset classes in 2023
Source: Bloomberg Finance L.P., Arbion Ltd., prices as of 31st May 2023
Ever since the end of the pandemic, we have been experiencing an increasingly two-speed economy whereby the consumer is doing fine but the broader economy is showing signs of strain. In essence, the micro is doing alright but the macro is looking a little shaky.
Sticky inflation
Oil and commodity prices falling
Weak credit growth
Commercial real estate prices declining
Chinese equities and credit signalling weakness
Leading indicators pointing to weakness
Deeply inverted yield curves
Unemployment claims rising
Germany in recession
US recession probabilities extremely high
The banking crisis has moved the macro element into the limelight and forecasts of further rate hikes instantly turned to rate cuts when Silicon Valley Bank required a bailout. Stickier inflation has subsequently reversed that view again with markets now expecting one more increase of interest rates in the US, two in the eurozone and four (!) in the UK where inflation is not coming down quickly enough.
This hawkish rate outlook is partly driving some of the other macro variables into a position that reflects a weaker economic outlook. Energy prices have been falling for some time now and many other key commodity prices have reversed course from their post- “China reopening” highs. What’s more, domestically traded commodities in China have been exhibiting substantial weakness
(domestic coal prices are down 40% since October), supporting the presence of a dual-speed recovery also in Asia.
Leading indicators as well as deeply inverted yield curves, especially in the US, reflect the sombre mood on the macro side. Add to this the dire state of commercial real estate markets in many countries and it is understandable that many are calling for an end to rate hikes.
On the other side of this equation, we still find the consumer who was bailed out during the pandemic with a variety of support schemes and is now enjoying higher wages, low unemployment and extra income from the literal cash that used to be on the side-lines.
Taken together, we are confronted with a market that is struggling to find direction, pulled and pushed between the Dr Jekyll and Mr Hyde.
The contrast between these two sides of the coin are best seen in what investors are expecting policy rates to be over the next few quarters. For the UK, which is still struggling with retail price inflation (RPI) of 11.4% year-on-year (April), markets are expecting four more rate hikes between now and January, whilst for the US where signs of a slowdown are more prominent, investors have priced in one rate cut.
Unlock the full article to gain valuable insights into the current market landscape.
Discover why the performance concentration of a narrow group of mega caps has been at an extreme this year and how it may impact your investment decisions.
Dive into the analysis of the US and Chinese economies, and understand the potential implications for future growth and volatility.
Explore the contrasting dynamics between the micro and macro aspects of the economy and their influence on market direction.
Stay informed about the expectations for interest rates and their impact on various sectors.
Important Information
The information set out in this document has been provided for information purposes only and should not be construed as any type of solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction or make use of the services of Signia Invest. Information about prior performance, while a useful tool in evaluating Signia Invest’s investment activities is not indicative of future results and there can be no assurance that Signia Invest will generate results comparable to those previously achieved.
Any targeted returns set out in this document are provided as an indicator as to how your investments will be managed by Signia Invest and are not intended to be viewed as a representation of likely performance returns. There can be no assurance that targeted returns will be realised. An estimate of the potential return from an investment is not a guarantee as to the quality of the investment or a representation as to the adequacy of the methodology for estimating returns.
The information and opinions enclosed are subject to change without notice and should not be construed as research. No responsibility is accepted to any person for the consequences of any person placing reliance on the content of this document for any purpose.
No action has been taken to permit the distribution of this document in any jurisdiction where any such action is required. Such distribution may be restricted in certain jurisdictions and, accordingly, this document does not constitute, and may not be used for the purposes of, an offer or solicitation to any person in any jurisdiction were such offer or solicitation is unlawful.
Signia Invest is a trading name of Arbion Limited. This document has been approved and issued by Arbion Limited, Authorised and regulated by the Financial Conduct Authority FCA Registration No 513138. Registered in England and Wales No 7044573. Registered office One Connaught Place, London, W2 2ET.
