• Hopes for a soft landing for the economy, fueled by the Federal Reserve, buoyed the markets in January. However, in March, problems began to emerge in the banking system. Although these problems could slow the rise in interest rates, an “accommodative” monetary policy is less likely to support the markets if financial conditions tighten.
• Economic growth appears to face greater risks in the U.S. On the other hand, Europe is showing some resilience thanks to low energy prices and favorable fiscal factors. China’s reopening is proceeding as planned and could still benefit from pent-up demand and excess savings.
• The challenge for the market will be to strike a balance between the hope for a “soft landing” without significantly affecting corporate profits, employment, or credit, while at the same time hoping that inflation will fall rapidly.
• Given weak growth and downside risks, our main recommendation is to increase the weighting of fixed income.
• As for credit, we maintain a neutral stance and prefer investment-grade investments over high-yield ones.
• Short-term interest rates on the sovereign yield curve are attractive by historical standards. We remain neutral on duration (around 4 years).
• To take a positive view of stocks at this stage, you need an optimistic set of assumptions about growth, interest rates, China, and policy. Otherwise, stocks must compete with attractive risk-free rates (around 5% in the short term).
• For this reason, we are moderately underweight in equities, due to higher growth risks and less attractive valuations, especially in the case of the U.S. We recommend increasing exposure to markets outside the U.S.
• We expect the dollar to weaken further, as interest rate differentials become less favorable due to a further decline in U.S. rates.
• In 2022, commodity markets were dominated by the dollar, but in 2023, the lack of investment will be the key factor. Although most commodities have a bullish outlook due to the reopening of the Chinese economy, fears of a recession in the U.S. could have an impact in the coming months.
• As for private markets, we expect the correction in valuations to continue this quarter (negative). Financing conditions remain tight and could tighten even further. Valuations are adjusting, “dry powder” remains at historically high levels, and deal flow remains low.
• However, on the private equity side, we see opportunities in secondary markets, given the attractive discounts that can be found in the market today.
• In private debt, direct lending remains the most sought-after private debt sub-strategy and distressed debt may benefit from the current stage of the economic cycle.
• Finally, in real estate income, we see a significant gap between the private and public sectors, with the public sector offering greater upside potential.

For more details, you can access the full report here.

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker