After a moment of hesitation in May, equity markets picked up more strongly: the global markets posted a performance of more than 3% in euro, making June the second strongest month of the year after January.
This rise was driven in particular by US stocks (+4%), followed by European markets (+2,5%) and emerging markets (+1%). The change in sector leadership was a significant precursor to a possible deepening of this market rise. In addition to consumer discretionary, industrials, basic materials, energy and finance, which were not the leading sectors this year, drove the markets higher. While placed behind them, technology performed perfectly well (3,5%). Moreover, renewed optimism on the markets penalised defensive sectors.
As markets were getting excited, bonds and central bankers continued to send warning signals. Equity markets simply ignored them, as they were busy pursuing their upward trajectory. The US 2-year yield rose sharply, and was up nearly 50 basis points at the end of the month, while 10-year yields rose by "only" 20 basis points.
This movement again put the spotlight on the infamous "inversion" of the yield curve, a signal of recession par excellence. With longer maturity yields expected to be higher than shorter maturity yields in "normal" times, the current situation is a cause for concern: the 10-year yield ended the month 110 basis points behind the 2-year yield, an historic inversion.
These increases in rates are due to stubbornly sticky core inflation on both sides of the Atlantic and "hawkish" rhetoric from central bankers. Indeed, the main central bankers maintained a very firm stance on inflation, which remains well above the 2% mark around the world. IMF Deputy Managing Director Gita Gopinath, also present in Sintra, recalled that inflation has never fallen so much, as expected by the market, without causing a severe recession. Meanwhile, central bankers recognise the risks of recession, but are also aware that monetary policy must remain restrictive: rates must continue to rise and must remain at high levels for some time. It's a fact: core European inflation is picking up again year-on-year, according to the preliminary estimate of 5,3% to 5,4% in June, and remains stable at 4,6% in the US. Alongside statements from central bankers, these figures led the bond markets to revise their expectations regarding monetary policies. Key rates are expected to peak at 5,5% in the United States versus 5,2% at the beginning of the month, and expectations of rate cuts have been pushed back from November 2023 previously to spring 2024. The same goes for Europe, where the deposit rate, currently at 3,5%, could approach 4% after the next two meetings of the European Central Bank (ECB).
Finally, macroeconomic figures speak for themselves with the warning signals they continue to send out. Overall, PMIs showed a sharp decline in manufacturing activity, and services activity is beginning to show signs of running out of steam, having buoyed the European economy for several months. A similar phenomenon is taking place in the United States, where consumption has been the main driver of growth for many months: we can now see that it has barely risen since the beginning of the year.
All in all, the current macroeconomic risks suggest a balanced allocation. After the rise in the markets, the earnings yield on equities is no longer attractive compared with risk-free yields of close to 5%, particularly in the United States. We therefore recommend remaining underweight on equities and overweight on bonds. In terms of sectors, we have overweighted technology, given the strong trend in artificial intelligence. Utilities are also attractive because they promise stable results, while the macroeconomic environment is gradually deteriorating. In fixed income, we recommend taking risks, limited by maintaining a neutral duration, and prefer US sovereign bonds to the rest of the universe.
The recommendations contained in this document are, unless otherwise expressly stated, those of Spuerkeess Asset Management and are produced by Carlo Stronck, Managing Director & Conducting Officer, Aykut Efe, Economist & Strategist, Guillaume Gehant, Portfolio Manager et Loïc Chaulacel, Portfolio Manager, acting under an employment contract with Spuerkeess Asset Management.
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