The economic outlook is soft, but not disastrous. US economy demonstrates strong resilience, highlighted by robust labour market conditions, and documented by a solid 2.4% annualized real GDP growth rate in Q2. There are no signs for a severe US recession.
During the quarter, the Federal Reserve raised the key interest rate range by 25 basis points, reaching a 22-year high of 5.25% to 5.50%.
Europe grapples with an economic downturn driven by higher interest rates, lower consumption, and fiscal restraint. A significant decline in business activity has arrived, whereas Germany has already entered recessionary territory.
The ECB has raised rates by 25 basis points to 4.0%, marking the 10th consecutive hike.
China’s economy faces deflationary pressures, with negative CPI and PPI, weak retail sales growth, and a struggling real estate sector.
Conclusion: Our cautious stance with a neutral position in equities and an overweight in credit has paid off. As an imminent severe recession can be ruled out, we are keeping our current risk positioning, but are prepared to reduce the equity allocation should rates continue to rise. At current valuation levels and from a risk/return perspective, we prefer selective credit over equities. Hence, we keep the overweight in credit investments, with a focus on loans and non-cyclical short-term HY bonds with yields of 8-9% and maintain the neutral position in equities. In this environment we prefer an absolute return approach compared to a classic relative value mandate.
