Monthly House Views - Chinese New Year - February 2023

China’s reponening bolsters our scenario of a soft landing. The start of the year brought relief for some of the risks overshadowing the world's economy. First, the rapid ending of Covid lockdowns in China should prompt a near automatic rebound in domestic demand which will be also good news for all trading partners. Second, the easing of pressures on Europe’s energy markets helps alleviate some of the continent's problems. This good news confirms our belief that the economy is headed for a soft landing. On the one hand, above average inflation continues to weaken household purchasing power and the property market. Meanwhile tighter interest rates discourage corporate investment. On the other hand, some big positives are still in place: households are still sitting on substantial Covid savings and labour markets continue to be strong.

Inflation will continue its rapid decline, but central banks will remain on the alert. The easing of commodity prices, particularly energy, should bring a rapid fall in inflation over coming months for developed economies. However, the ripples of the price shock that hit a year ago will continue to spread, notably through wages, keeping underlying inflation high. Central banks will continue to tighten policy in the short term before calling a halt. They are likely to stick to their hawkish tone until sure that underlying inflation can be brought back to near target.

Investment strategy remains cautious, with greater regional differences. We retain the broadly cautious tone of our investment strategy and our equities Underweight. Risks of an overly adverse scenario are receding, leading us to raise exposure to emerging market equities and commodities while continuing to overweight European vs. United States stocks. In this higher-rate environment we are retaining our Overweight to US sovereign bonds and top-rated US corporate debt.

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