In a Nutshell

Our view on the markets

No landing?

Economic activity data have frequently been surprising on the upside lately while inflation has not receded as rapidly as hoped. A “no landing” scenario nevertheless is not a plausible one. There will either be a soft landing on the back of rapid disinflation, or the US Federal Reserve will make a monetary policy mistake by keeping interest rates too high for too long. A recession in 2024 is not yet off the cards.

Cash is king

After a rally, a correction often lurks around the corner, and in fact, the risk/reward tradeoff on equity markets has worsened in the wake of the recent share-price gains. Bonds are thus becoming even more interesting from a relative value standpoint in view of their high yields. But attractiveness varies even within the fixed-income sector. Thanks to high interest rates entirely without any risk, cash is king now more than ever.

A year of war and no end in sight

After a year of war in Ukraine, a swift resolution of the conflict seems a remote prospect. Neither Ukraine nor Russia is likely to emerge the clear victor. However, none of the other conceivable scenarios has a prob- ability above 50% of materializing either. The armed conflict in the heart of Europe threatens to turn into a proxy war between the USA and China during the course of this year.

Central banks in the red

The era of ultralow and negative interest rates has been over since last year. This sea change means not just higher yields for investors, but also imposes massive losses on central banks. Although central banks can’t “go bankrupt” and are able to operate even with negative equity, the red ink on their balance sheets nonetheless has consequences. A long string of losses could endanger central banks’ independence.

Ask the experts

Has the recession been called off or merely postponed? Is the proverb “Don’t Fight the Fed” still valid? Can European and Chinese stocks continue to outperform? Are (US) government bonds still a valuable diversifying element in an investment portfolio? And why should a person continue to invest in stocks when a return of 4% to 5% p.a. can be earned with short-term investment-grade bonds (denominated in US dollars)? You’ll find our answers to these questions in our quarterly Q&A.

In recent years, quantitative easing (QE) was frequently cited as the main driver of the equity bull market. There accordingly was a lot of insecurity surrounding the inevitable end of QE. The last 15 months have put the theory that stocks are no longer capable of rising without the aid of liquidity injections to the test. The combined assets of the five most important central banks have shrunk by 6% since May 2022, but the global equity market had already plummeted by 18% over the five months prior to May 2022. The world equity index, in turn, has risen by 20% since October 2022 despite the continued shrinking of central banks’ balance sheets through quantitative tightening (QT), which is not visible on the edge of the chart solely due to securities purchasing by the Bank of Japan and currency effects. The psychological effect of the securities purchases likely had a bigger impact than their actual volume did. The reverse now applies: as long as the withdrawal of liquidity remains gradual and predictable, it shouldn’t pose a major risk to the market.