Monthly summary – June 2023

Rates, recession and a Russian uprising! After the dominating themes in May; the US debt ceiling on one hand and the brilliant prospects of Artificial Intelligence on the other, evaporated from investor’s minds and central banks’ policies and the risk of a looming recession took center stage in June. Following a fantastic first half of the year, the Nasdaq lost some momentum, not least when the commercial potential of the AI story came into question.

Concerns about inflation and interest rate hikes took over

The less than ten stocks that have driven global indices higher so far in 2023 did not continue their upward trajectories at the same pace and posted a slightly more lackluster but nevertheless a positive performance in June. Simultaneously, worries concerning sustainable inflation and continuous central bank interest hikes made investors weary of the overall macro-economic scenario, even though favorable statistics towards the very end of the month eased some of those concerns.

The main take of the “bear camp”, including the strategists of several global investment banks, who ever since last autumn have warned of falling earnings, again attracted attention when fears of a looming recession took hold and equity markets seemed to hesitate. The volatility index, VIX, which had fallen successively lower in an ever more laid-back positive sentiment, momentarily rose in anticipation of increased negative movements in the markets.

Troubling when the Wagner group marched toward Moscow

Apart from general economic worries, developments in Russia delivered an unforeseen twist, when the mercenary Wagner group marched toward Moscow. For an intense weekend, the uprising awakened worries that a civil war, with all its implications, was threatening the stability of the repressive Putin regime. However, within 24 hours the advance came to a halt as a deal was brokered that lead to the exile of Wagner leader Prigozjin and a return to the barracks of the Wagner troops. Apart from some initial anxiety, the investment community took little notice of these events, while the war in Ukraine continued to attract only limited interest.

Blinken met Chinese counterpart in Beijing

In another area of potential conflict, the US and China had their first high-level meeting in five years when foreign secretary Anthony Blinken met with his Chinese counterpart in Beijing. The meeting was seen as an attempt to de-escalate the tensions between the two countries and as possibly leading to a meeting between presidents Biden and Xi. However, disappointment regarding Chinese economic growth following the re-opening of the country weighed down on investor sentiment.

World index up for the fourth consecutive month

The world index rose in June for a fourth consecutive month, again with differences depending on base currency. All global sectors advanced, led by consumer discretionary and industrials, while consumer staples and healthcare lagged the world index. By far the best performing sector year to date, information technology, continued its advance, albeit at a slightly lower pace. However, this was enough to enable the US markets to outperform Europe as well as the main markets in Asia.

OUTLOOK

The risk of an upcoming recession is still palpable even though many large economies, especially the US, are showing signs of decent growth. However, core inflation is not coming down fast enough according to many analysts, especially inflation in the service sector. The labor markets also show evidence of continued very high demand for skilled labor. The central banks, the ECB and the Fed, are therefore clearly communicating that several interest rate increases are to be expected.

Interest rates starting to show effect

We are approaching a time when earlier interest rate increases may be starting to show a more pronounced tightening effect. This could involve falling demand for goods, services and labor. Historically, this can happen relatively fast, in a couple of months, after a longer period of lag. We are increasingly concerned that central banks are too zealous in their fight against inflation and are not letting enough time pass before examining the effects of interest rate increases on the economy.

Unprofitable companies may struggle

Money has become more expensive. The stock market is less inclined to put in additional capital unless break-even can be forecast with certainty. The financially weakest companies have the hardest time once the economy declines. Furthermore, the valuation of growth companies with high multiples can also be negatively affected, especially those affected by declining demand as a result of the recession.

Expected volatile times ahead

It is not certain that there will be negative growth in individual quarters in the major economies of the West this year or next year. But our assessment is that the risk of lower growth is quite high. Because demand for healthcare has shown good stability over time, we believe the sector is likely to be in a position to cope with a worsening economy better than many other sectors. However, it may be volatile times ahead if the stock market suffers a significant correction. Right now, this looks somewhat distant. Optimism for a soft landing remains unbroken. A soft landing is the scenario that we would prefer.