The market dynamics for the second quarter of 2023, were more subdued. The dynamics of inflation declining from its peak and the absence of a long forecast recession in the US and Europe, meant that riskier asset markets were comfortable looking through their previous concerns. This was despite the US regional banking crisis, where the authorities’ quick reaction meant that the situation was seen to have been stabilised in the near term. What was even more remarkable was the narrowness of the US equity market rally and all of the concerns around the US commercial real estate market. The expansion of the Federal Reserve’s balance sheet to support the regional banks can be seen as stimulatory. From a longer-term perspective, the direction of travel for monetary policy globally is for ever more contractionary monetary policy as central banks continued to tighten.
KEY POINTS
- We retain a defensive posture, although we are starting to see some interesting investment opportunities across equity, bond and credit markets.
- The high level of dispersion in equity market valuations presents some excellent investment opportunities.
- The weight of interest rate rises continues to show up in pockets of the economy and the pricing of commodity and bond markets. Contrary to this, the sanguine credit and equity markets suggests underlying resilience. Experience suggests these types of contradictions warrant a degree of caution.
- Income oriented strategies focused on harvesting yield are starting to provide prospective returns above those for equities for the first time in many years.