Charles-Henry Monchau

Chief Investment Officer

Luc Filip

Head of Discretionary Portfolio Management

Adrien Pichoud

Chief Economist & Senior Portfolio Manager

Key changes to our asset allocation (one-month view)

First, the macroeconomic context is improving. True, global economic growth is expected to slow down in 2023. However, the pace of growth is likely to be stronger than initially expected. The probability of a US recession has dropped over the last few weeks on the back of a more resilient than expected US consumer, and a diminishing drag from fiscal and monetary policy tightening. The energy crisis in Europe proves to be less severe than initially expected which leads to a positive economic surprise. In China, we expect real GDP growth to accelerate throughout 2023, driven by the country’s rapid reopening and likely to be further aided by policymakers’ recent refocus on growth. 

Meanwhile, global inflation is cooling down. In the U.S., an easing in supply chain constraints, a peak in shelter inflation and slower wage growth should lead to a continued decline in the inflation rate. The fact that Fed Chairman Powell keeps mentioning that “the disinflationary process has started” is perceived by the market as the first step towards a Fed pivot (pause or rate cuts). In Europe, headline inflation should also ease significantly, reflecting sharply lower gas prices. Core inflation might however remain stickier due to continued services inflation pressure. 

Overall, the growth / inflation mix is thus improving compared to 2022. And while global monetary policy remains hawkish, the cooling down of inflation is leading investors to anticipate a pivot (pause or rate cuts) later this year. While global earnings might not be able to avoid a recession in 2023, markets are forward looking and are starting to anticipate an earnings recovery in 2024. 

Our one-month tactical view is based on the weight of the evidence i.e. the aggregation of our fundamental and market indicators. Compared to the previous months, we believe there is indeed a marginal improvement in some of our leading indicators (e.g macroeconomic outlook – see next section). Despite a light deterioration in our market dynamics indicators (from positive to neutral), we have kept a positive stance on global equities with a few changes in terms of regional preferences.  

We are shifting our view on eurozone equities from cautious to positive. The European economy is benefiting from milder weather than expected and from the reopening of China. We note that valuations remain fair to cheap despite the recent rally. We are also upgrading our stance on UK equities from cautious to positive. Despite the gloomy macro outlook for the domestic economy, the FTSE 100 benefits from its high exposure to value / cyclicals sectors and from the weakness of the Pound. 

We keep an attractive view on EM Asia / China. Our favourable thesis on this region is reinforced by the reopening of China after 3 years of strict lockdown. Chinese consumers have substantial savings; this should benefit not only the local economy but also the demand for domestic stocks. 
We remain positive on Switzerland and the US. We are cautious on Japan, EM Latam and other EM.

Within Fixed Income, we have kept a cautious stance on rates and an attractive view on credit. Within rates, we favour the front end as it offers a decent carry and low-rate sensitivity, while the historical level of yield curve inversion argues for staying away from the long end. In addition, recent positive economic surprises in the US, technical analysis and recent deterioration in liquidity could argue for further upward pressure on long-term yields. Within government bonds, we keep a preference USD over EUR (unattractive) where ECB has yet to catch-up. Ms Lagarde confirmed a further 50 bps hike at the next ECB meeting (March) and a higher terminal rate than market expected. The ECB expects "very strong" wage growth in the coming quarters, while no recession is expected anymore in the eurozone in 2023.  Peripheral yields should benefit from the ECB's new tool (IPT) and Italian yields have shown resilience after the country’s election results.

The QT program should run smoothly and not affect peripheral yields too much. We note that periphery valuations are expensive as the difference between Italian and German 2-year yields is close to 0. 

Within credit, despite the recent spreads tightening, the risk-reward remains appealing due to the high level of carry and potential for further spreads compression. We are moving to longer investments in the 5–10-year segments due to the steepness of the credit spread curve which fully offsets the inversion of the U.S. Treasury yield curve. We also favor high quality paper (A- rating or higher) where absolute yields are still offering attractive entry point. European high yield remains relatively more attractive than US high yield due to persistent exogenous factors (war in Ukraine, electricity prices).

However, we note that the European premium is evaporating rapidly. We remain very cautious on U.S. high yield, as absolute (spreads) and relative (to Investment Grade bonds and U.S. Treasuries) valuations are sinking into expensive territory. Subordinated debt is one of our favorite fixed income positions. This asset class is now mature, resilient, and is supported by strong fundamentals. It still offers premiums and attractive valuation (in relative terms) despite the recent rally. The sector continues to benefit from strong capital position, low non-performing loan ratios and balance sheets that remains well provisioned. However, we recognize that banks are accelerating share buybacks and dividend payments.

We are downgrading emerging market debt (hard currency) from positive to cautious due to valuation concerns. Emerging market bonds have rallied impressively, outperforming investment grade US corporate bonds by more than 5% over the past six months. But rising idiosyncratic risks and the tight premium to investment grade bonds make us tactically cautious.

We are upgrading our stance on commodities from POSITIVE to ATTRACTIVE. Supply remains constrained on a number of commodities while China re-opening should increase demand for key raw materials such as oil and metals. With regards to energy, We acknowledge that prices are likely to remain volatile in the near term, however, we believe that the OPEC+ will continue to manage the market and mitigate any material downside risk to oil prices while waiting for the improving global economic outlook to bolster demand. We remain positive on the metals complex for the above-mentioned reasons.
We remain positive on Gold. After rallying from its September lows, gold sold off following the last FOMC meeting as Powell indicated that the Fed will continue its rate increases through H1 in order to fight inflation. The Fed lifted its benchmark’s target by 0.25 bp to the 4.5-4.75 range. However, we continue to believe that gold is positioned for gains starting in H2 as the Fed will probably stop its rate hikes then (in line with the bond market and US –Treasury yield forwards) as well as the softer US dollar.

On the forex side, we have kept our positive stance on the euro and the yen against dollar. The resilience of the eurozone economy will most likely incentivize the ECB to keep increasing rates while quantitative tightening will effectively start in March. At the same time, the Fed is getting closer to the end of its monetary policy tightening cycle. Interest rate differentials is thus becoming more favourable to the euro. The macroeconomic and liquidity context is also shifting in Japan. While the Bank of Japan was reluctant to lose its grip on yield curve control last year, rising inflation and selling pressure on JGBs is forcing the BoJ to adopt a more hawkish tone. This should benefit the yen. 
With regards to hedge funds, macro and CTA strategies remain among the best portfolio diversifiers. 

Indicators review summary

Our tactical asset allocation process is based on five indicators. 

We are upgrading our Macro-economic cycle from “NEUTRAL” to “POSITIVE” as we believe that the growth / inflation context is becoming more favourable to risk assets (see details below). We are downgrading our market dynamics indicator from “POSITIVE” to “NEUTRAL”.

Other macroeconomic and fundamental indicators remain unchanged. On an aggregated basis, our indicators are pointing towards a “POSITIVE” view on risk assets.

pic 1-4


Indicator #1 

Macro-economic cycle: from Neutral to Positive

Global macro momentum has turned positive in the past couple of months, thanks to China’s re-opening, Europe bouncing back from initial energy crisis concerns, and the resilience of the domestic US economy (e.g the spectacular January job report and the strong bounce in ISM services, pointing to continuing solid growth). 
We cannot ignore the potential downside risks lying ahead, first and foremost the tightening in financial conditions and the impact of fiscal policy that could become a significant headwind in the US if no agreement is reached on the debt ceiling by the end of the summer.

Still, it seems that those risks are more a “H2 2023” or  “2024” concern. In the current conditions and based on the most recent data, the macroeconomic backdrop could be quite supportive for the months ahead: positive growth momentum, inflation slowing down and central banks signalling the end of their rate hike cycle.
We are therefore adjusting our assessment for the macroeconomic cycle from NEUTRAL to POSITIVE, even if it is only temporary. 

Global growth momentum is bouncing back (at least temporarily) on the back of a mild European winter, US resilience and China reopening. 

PIC 2-Feb-14-2023-04-06-38-4037-PM

Source:  Banque Syz, FactSet 


Indicator #2 

Liquidity: Negative


Central banks remain firmly on the path of rate hiking. To regain control on inflation, and preserve its credibility, the Fed has no choice but to tighten monetary policy until there are clear and tangible signs of a reversal in inflation dynamics.
Overall, the liquidity environment remains negative for risk assets as most developed markets are facing more rate hikes, quantitative tightening and global liquidity reduction. Nevertheless, we are getting closer to a Fed pause and the pace of rate hikes is slowing down, i.e the second derivative is starting to improve. Indeed, the fact that inflation is cooling down and that the US employment has probably peaked should soon give an occasion for the Fed to pause its monetary policy tightening cycle. During the last FOMC meeting, Chairman jay Powell made clear that we are getting close to the end of tightening (“we are not very far from the peak level (…) we will be carefully watching the economy and disinflationary process”).

He added that there is “no incentive, desire to overtighten” and seems to be comfortable with the current easing of financial conditions ("our focus is not on short-term moves, but on sustained changes” to financial conditions). This change of tone – and the emphasis on disinflation in particular - is an indication that the rate hike cycle is not over yet, but it is likely getting close to an end. Expectations of subsequent rate cuts will depend on inflation developments. 


Indicator #3 

Earnings growth: Negative


Q4 earnings delivery is mixed, with EPS growth coming in sequentially lower, at -5% y/y in the US, and +4% y/y in Europe. S&P500 blended Q4 ’22 EPS has seen a meaningful retrenchment since last summer, and is so far not showing an inflection higher, as was typically seen during past reporting seasons. The proportion of companies beating EPS estimates has come down significantly this quarter, in both regions.
Earnings have been downgraded by consensus for 2023, but not much. 
Analysts are realizing their 2023 EPS estimates might have been too optimistic. The pace and breadth of negative revisions is in line with other recessionary episodes. Also, highly cyclical sectors like semiconductors are experiencing EPS slashes in the 30% area, which are almost consistent with a recession. Consensus still expects no fall in EPS this year, and then a meaningful move up next year.

We continue to believe that expectations for 2023 are too optimistic as companies might face negative operative leverage: they will not be able to pass on more costs to the customers (lower nominal sales growth) while they will have to absorb higher wage and input costs. Yet, 2023 EPS consensus at $225 implies roughly a 4% earnings growth this year. In recessionary episodes, the average EPS decline is instead -30%.

The Chinese reopening is obviously playing a role in boosting cyclical growth expectations around the world. Countries with tight Chinese trade relationships like Germany or Australia have outperformed in a risk-adjusted way. Within sectors, US semiconductors and high beta have been the market’s darling while defensive sectors like staples and utilities are lagging. Soft landing vibes are getting stronger, helped by the Chinese reopening.
While we keep a NEGATIVE assessment on earnings growth, we acknowledge the fact that investors might look beyond 2023 earnings recession and start to focus on 2024 earnings recovery.  

US and Europe EPS Growth consensus projections

us and europe eps growth consensus projectionsSource: IBES, JP Morgan

Indicator #4 

Valuations: Neutral


Global equity valuations have de-rated in 2022. In the US, the S&P500 multiple has de-rated by the same magnitude seen in previous recessions. On a relative basis, Equity Risk Premium is a headwind now, as it has probably reached a bottom. We note that cash and bond yields are now competing with equities. Overall, this indicator remains NEUTRAL.

Equity markets are less expensive than at the start of 2022, but they are not cheap either. However, there are clear differences across regions. For instance, Europe, UK and Japan 12-month forward P/E are much lower than median P/E over the last 20 years. EM Asia is not expensive either. On a trailing basis, stock market valuations have now fallen back to their levels of 2015-19.

Stock market valuations have now fallen back to their levels of 2015-19 

stock market valuations

Source: BCA research

Indicator #5 

Market Dynamics: from POSITIVE to NEUTRAL 


Our market dynamic indicators have moved from deep positive territory (for both our US and European proprietary models) to levels which are closer to neutral. In the US, the S&P 500 broke upward its 200-days moving average, but the trend is neutral overall as this moving average has not turned up yet.

Market participation (breadth) is positive with more than 70% of the US stocks in an uptrend. Sentiment is now neutral with put to call still too low. The volume indicator is flashing green. In Europe, the trend and market breadth are both positive. Sentiment is neutral with volatility being too low. Our market dynamics indicators continue to favour Europe over the US. 

Risks to our view

While market dynamics are less positive than a month ago, the improvement of the global growth / inflation mix at a time when central banks are getting close to the end of the rate hike cycle leads us to stay constructive on risk assets (equities and credit). 
Nevertheless, we would like to stress out that this is a 1-month tactical view and that there are risks attached to this scenario.

One major risk is the fact that the improvement of global economic growth could force central banks to continue tightening their monetary policy more than what is currently priced in by the market. The combination of a hawkish monetary policy and an earnings recession could prove to be a challenging one for equity markets.

Tactical positioning: our asset allocation matrix

tactical positioning-1



This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document.

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