”We remain sceptical on inflated valuations because the uptrend in risk assets is due to the laggards catching up rather than any meaningful improvement to earnings outlooks.”
The optimism on risk assets behaviour partly stems from most of the hiking cycle now being behind us and a better-than-previously-expected economic picture, mainly in the US. Here, we continue to expect a mild recession in 4Q23/1Q24, but we upgraded our 2023 growth forecast to 1.6% on the back of better Q1 growth revisions. The Eurozone should avoid a recession, but risks related to ECB overtightening and growth divergences among countries persist. For China, we downgraded 2023 growth forecasts to 5.1% due to a weak Q2 and delayed stimulus. Consequently, the following factors could drive economic considerations:
- Excessive optimism on shaky foundations. The strength in US growth is more mechanical and forward-looking indicators point to subdued activity. In Europe, risks are skewed to the downside, also because of the weakness in China.
- Watch out for core inflation regarding the policy path. Core disinflationary trends (and not a mild recession) could prompt the Fed to cut rates next year. But core inflation could still be sticky. Another factor to watch is real funds rates.
- Upward pressures on terminal rates. The ECB is not in a pause mode. Even for the Fed, we see pressures on our terminal rates forecast of 5.5%. However, financial stability concerns and financial conditions amid risks of overtightening must be monitored.
- Long-term shift from West to East remains. Despite China moving to lower growth, EM continue to present selective opportunities.
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