Flexibility and agility in asset allocations

Vues sur les marchés25.07.2023

Each month, LBP AM deciphers market news in video. In July, Research strategist Xavier Chapard shares his views on asset allocation in our monthly "Vu(es) sur les marchés".

The rise in key interest rates is not quite over. Central banks surprised us again in June by announcing that rate hikes would continue this summer, as inflationary pressures remain too high, particularly in the labor market. As a result, policy rates will return to levels not seen since the mid-2000s, more than 4% higher than at the start of last year.

For the time being, markets have reacted well to these rate hikes, as economic growth since the start of the year has remained positive and inflation has begun to ease.
But economic conditions outside the US are showing signs of weakening as we approach summer. The rebound in services seen since the start of the year is beginning to run out of steam in the Eurozone and China, compensating even less the weakness in the manufacturing sector.
So how should we position ourselves on the markets in this context?

Asset allocations  

We believe that the market is too optimistic and we should remain cautious in our asset allocation. In the space of 9 months, the markets have gone from being very pessimistic to somewhat complacent. The easing of purely inflationary shocks linked to Covid and energy has removed the risk of inflationary recessions, which is the worst-case scenario for the markets. But markets are now positioned for a scenario where there is no significant slowdown in growth despite the abrupt monetary tightening.

Fixed Income  

Interest rates on government bonds have returned to the level they held prior to the mid-March bank stress, the highest in over 10 years. From a cyclical point of view, falling inflation and the economic slowdown point to a gradual reduction in interest rates. But given persistent inflationary pressures, rates are likely to remain high in the months ahead, accelerating Central bank balance sheet deleveraging and persistently high public deficits. All in all, we expect interest rates to remain volatile, but with no clear direction. We are therefore neutral on sovereign debt, preferring shorter maturities Eurozone bonds.


We remain exposed to European corporate bonds to capture the high carry, while remaining highly selective, particularly on the riskiest issuers. Corporate fundamentals are solid overall, which should enable them to withstand deteriorating earnings. But defaults are starting to rise again, as credit supply tightens for weaker companies.


Our positioning remains rather defensive on European and US equities. There are no excesses in terms of valuation, apart from US tech, because profits are very high. But the question is: can these profits stay this high? That's what the markets are anticipating in their central scenario, which seems optimistic to us. We believe that margins are likely to be squeezed by the slowdown in sales, while corporate costs continue to rise. We continue to bet tactically on the Chinese market, which is very cheap, and have a longer view on Japanese equities, which are benefiting from more positive economic, monetary and reform cycles.

All in all, the landing of the economy and markets after the Covid and geopolitical shocks is still not over, keeping uncertainties high. This brings volatility, which calls as always for diversification and agility in market positioning.

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