Link
Despite rising energy prices and higher interest rates, the global economy continues to demonstrate resilience. In this latest edition of Market Insights, Sebastian Paris Horvitz, Head of Research at LBP AM, reviews the key developments of the summer and shares his investment views for the months ahead.
The summer did not bring the geopolitical easing many investors had hoped for. The conflict between the United States and Iran remains unresolved, with no clear path toward de-escalation, contributing to a renewed increase in energy prices.
At the same time, long-term interest rates moved significantly higher, reaching their highest levels in almost two decades in both the United States and Europe. This reflects not only energy-driven inflationary pressures but also ongoing uncertainty surrounding the future direction of monetary and fiscal policy.
Higher energy costs and tighter financing conditions naturally pose risks to economic activity. However, at this stage, these factors do not challenge our central scenario of continued global growth, although at a more moderate pace than previously expected.
Economic momentum strengthened over the summer. Growth continues to be supported by public spending, particularly in the United States and Germany.
These investments are primarily focused on two key themes: the development of artificial intelligence and increased defence spending. Such public support is helping sustain economic activity despite a more challenging macroeconomic environment.
Against this backdrop, we believe risk assets can continue to benefit from a supportive environment. Nevertheless, the significant uncertainties surrounding the current economic outlook call for a degree of caution in the near term.
We continue to expect two additional policy rate hikes from both the European Central Bank and the US Federal Reserve over the coming quarters. As this scenario is already largely priced in by markets, short and intermediate-term government bonds currently appear attractive, both as a source of income and as a diversification tool.
By contrast, we remain more cautious on long-duration bonds, which, in our view, require a particularly agile approach.
Within European credit, we are increasing our exposure. Despite historically tight spreads, corporate bonds continue to offer attractive carry opportunities. We maintain a strong preference for high-quality Investment Grade issuers and remain highly selective in the High Yield segment, favouring shorter maturities. From a sector perspective, banks remain among our preferred areas of investment.
Equities: a more cautious stance toward Western markets
Within equities, we are adopting a more measured stance. Investor positioning appears relatively optimistic, which could leave markets more vulnerable to disappointment should adverse newsemerge.
We also believe that corporate earnings growth may prove somewhat less supportive than consensus expectations currently suggest. As a result, we are moderating our outlook on both US and European equity markets.
Conversely, we maintain our exposure to China. Valuations remain attractive and Chinese companies continue to demonstrate strong export capabilities. We also expect further targeted policy support from Chinese authorities in the months ahead.
Finally, we are softening our negative view on Japan. The market correction seen since the summer appears to have already priced in much of the faster monetary tightening that we expect from the Bank of Japan.
The views expressed (i) are considered reliable by LBP AM and are based on, or justified by, the prevailing economic, financial, market and regulatory environment, and (ii) are provided for information purposes only.