Monthly comment February 2023

Index

• Markets
• Economy
• Geopolitics
• Conclusions
• Allocation
• Market data
• Event calendar

Markets

The month of February was mixed for major financial markets. While the U.S. stock exchanges experienced a slight decline of around 2% on the Dow Jones, S&P500 and Nasdaq indices, European stock exchanges maintained their January levels and consolidated their positive trend from the beginning of the year. The Eurostoxx 50 index showed little change, as did other continental stock exchanges. In Asia, stock market performance was also lackluster, with the Nikkei closing flat and the Chinese CSI 300 index down 2.5%.
During February, many companies released quarterly results, which were on average positive and often exceeded analysts' expectations, particularly in the technology sector, which contributed to the support of the Nasdaq index.
Despite the volatility in February, the performance since the beginning of the year remains positive, with the S&P 500 up about 4%, the Nasdaq up about 10%, and the Eurostoxx 50 up about 12%.
On the bond front, we have seen a rise in rates in both the dollar and euro areas. The world's major central banks raised their benchmark rates as previously announced. The Federal Reserve raised its benchmark rate by 0.25% to 4.75%, while the ECB raised its rate by 0.50% to 3%. The central banks reiterated their commitment to fighting inflation and maintaining a restrictive monetary policy with further rate increases. The market now expects the Federal Reserve to raise the rate to about 5.25%, while the ECB may raise it to about 3.75%. These statements have led to a rise in rates across the entire yield curve, particularly on the short-term end around the two-year mark, resulting in the inversion of the curve, where short-term yields are higher than long-term yields.
In this context, we have also seen a widening of credit spreads, which have returned to the levels of the beginning of the year.

Economy

During the month of February, important economic data was published, including figures for inflation and GDP growth. In the United States, the inflation rate showed an annual increase of 6.4%, slightly higher than the expected rate of 6.2%. In Europe, inflation remained very high at around 8.6%, with some countries such as Germany and Italy recording even higher levels. Recent GDP growth data indicate that the U.S. economy is growing steadily at around 2.7%, while the European economy is in a slowdown phase with annual GDP growth of 1.9%, indicating the risk that some countries may enter a recession as early as the next quarter. Overall, the growth forecasts for the major economies for 2023 have been revised downward. In this context, the task of central banks becomes complex as they must combat galloping inflation with tight monetary policies and rate hikes, but without risking driving economies into a recession. The next monetary policy moves are scheduled for the second half of March, with further rate hikes of 0.25% expected from both the Federal Reserve and the ECB.

Geopolitics

The international geopolitical situation remains unstable over the past month, with numerous events contributing to maintaining tensions between different world powers. For example, the situation between Russia and Ukraine continues to be tense with no signs of an imminent solution. Meanwhile, China appears to have proposed a possible solution to the conflict that would require a ceasefire agreement and a clear demarcation line, similar to that between North and South Korea.
Tensions between the U.S. and China remain high, especially after the U.S. shot down some Chinese balloons that the U.S. said were spying on their military sites.

Conclusions

As mentioned above, the major global equity markets are maintaining the positive trend started at the beginning of the year, while the bond market is suffering from rising rates and credit spreads. Currently, the most important issue at stake concerns interest rates, with central banks engaged in an active fight against inflation, which nevertheless remains very high and well above the ideal target of 2% set by the banks themselves. The market is divided on this front: some believe that central banks will soon stop raising rates and start cutting them again in the second half of the year, while other experts believe that this inflation will have a long life and therefore central banks will have to maintain restrictive monetary policies for a long time. In any case, rising interest rates will hit the most indebted sectors and issuers with low credit ratings. For this reason, we believe that bond sectors such as high yield and emerging market could perform below average in the medium term. As for the equity market, we remain slightly overweight, partly considering the positive quarterly data being released these days.

Allocation

Liquidity

Bonds

Equity

Precious metals & Commodities

Geo-tactical allocation

Switzerland

Western Europe ex Switzerland

North America

Latin America

Asia Pacific

Top sectors

1. Energy
2. Materials
3. Financials

Market data (data as of 28.02.2023)

Event calendar

Legend