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LGT Beacon: Investment perspectives May 2023

May 25, 2023
  • The major economies successfully avoided a recession to date, with forward indicators pointing to resilient demand
  • Inflation will continue to decline, but economic resilience will keep it above target levels in the coming months
  • Q1 corporate earnings well above expectations in most sectors, in line with stronger-than-expected economy  
  • Anticipated US monetary policy easing this year is thus premature, while the ECB will keep hiking interest rates  
  • We expect US Congress to reach an agreement on the debt ceiling, limiting duration of potential disruptions
  • Tightening credit conditions lead to challenges and decreasing valuations in private markets but also to opportunities

Investment actions:

  • We roll over our profitable short-put position on the EuroStoxx and reaffirm our overall tactical positioning
  • Duration remains short in favor of high cash reserves, while we continue to have no active bets in currencies

The major economies have successfully avoided a recession to date, with forward-looking indicators suggesting stable manufacturing and robust growth in services globally. Inflation is falling and should continue to decline this year. While Europe faces challenges due to the war in Ukraine and other differences, its economic cycle generally follows that of the US with a small delay. Despite declining headline inflation, the economy's resilience is expected to keep it above target levels well into next year. Anticipated rate cuts thus seem premature. The Federal Reserve is unlikely to cut rates until next year, while the European Central Bank may still raise rates a few more times. Financial conditions will likely remain tight, potentially adding pressure to the credit system and real economy. 

Regarding politics, an agreement on the US debt ceiling is expected between Democrats and Republicans, reducing potential turmoil. Geopolitically, events like the war in Ukraine or elections in Turkey are unlikely to unsettle investors. Regarding the former, there is also an increasing international willingness to engage diplomatically among stakeholders and conflict participants. 

In Q1 2023, the US economy showed resilience, enabling it to withstand the challenges posed by the rise in interest rates and avoid a recession. Corporate earnings have also exceeded expectations in ten of the eleven main sectors of the market. Although S&P 500 earnings per share (EPS) registered a year-on-year decline of about 3%, the profit level surpassed the consensus forecast by 6.5%.

To read the full report, click on the link: LGT Beacon