After China's rebound, now eyeing US growth 24 April 2023
This note contains a section on recent developments, our views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
Markets at a glance
The economic rebound is under way in China with real growth (growth after inflation) beating expectations. Official data showed that it accelerated to 4.5% in the first quarter of 2023 from 2.9% year-on-year in the final quarter of 2022. The recovery was uneven but most economic indicators point towards its broadening. One such indicator is the elevated level of new deposits, which suggests consumer spending is yet to reach its full potential. This coupled with the ongoing state support and a rebound in real estate bodes well for assets, such as equities, in China and the neighbouring regions over the medium term. This is why we remain overweight Asia-Pacific equities in our tactical asset allocation.
Last week, US data showed a softening of the labour market which, combined with mixed company earnings, weighed somewhat on market sentiment given growing recession fears. This resulted in a moderate downtrend in US equities and US Treasury yields (which implies higher Treasury prices, as they move in opposite direction vs yields). We retain our increased exposure to US Treasuries in our tactical asset allocation.
This week, US economic growth data for the first quarter of 2023 will likely be scrutinised by investors. High-frequency data, such as the ISM manufacturing survey, have only started to weaken in late-February so the overall figure may not be too bad (consensus is 1%).
However, we expect a mild recession in the US later this year given the sharp increase in interest rates that is now impacting lending and overall economic activity. As such, we thinkthe US Federal Reserve (Fed) will likely pause its interest rate rises after a final 25 bps rate increase in May.
Elsewhere, the purchasing managers’ surveys for the euro area and the UK showed resilient service-sector activity, but a further decline in manufacturing orders. This weighed slightly on the euro. We think this could lead to a moderate depreciation of the common currency in the very near term against the US dollar. However, we expect a stronger euro relative to the US dollar in late 2023 as the European Central Bank (ECB) will probably continue to increase interest rates after the Fed pauses, given that core inflation remains stickier in the euro area than in the US.
Portfolios at a glance Here’s how we are positioned in our flagship portfolios:
A quick reminder on our positioning following changes we made earlier this month: we maintain our overweight position in government and high-quality corporate bonds over riskier bonds within fixed income, and our quality bias within equities.
This positioning has been beneficial to performance year-to-date, which is reflected in the positive absolute performance across risk profiles.
The following key drivers have contributed to this positive performance:
Exposure to technology stocks that have performed well – of which we have also taken some profits
Limited exposureto volatile sectors, such as banks
Strategic allocation to gold
Although market sentiment has improved this year, we are still slightly cautious in our asset allocation positioning because of the ongoing recession risks and uncertainty surrounding the corporate earnings outlook. We therefore maintain our reduced exposure to equities and preference for quality bonds at this stage.
Past performance is not a reliable indicator of future returns.
Market Performance Data as of 21/04/2023. Source: Bloomberg. Note: The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used. Past performance is not a reliable indicator of future returns.
Information correct as of 24 April 2023.
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