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Tuesday 21 March 2023
March 2023 | In the US, the credit crunch, which is already starting to materialize, will impact growth and will determine how pronounced the recession will be. Amid a weaker economic outlook, the market is reassessing central banks' actions. European banks' earnings growth will still be positive, just less so than previously thought. Concerns about credit crunches in Europe appear excessive amid the strong liquidity profile and capital position of European banks. While we already started the year with a cautious stance in risky assets, we have become increasingly prudent in credit high yield. We have also become more constructive on US duration, as it has started to work again as a diversifier of risk in periods of turmoil.
01 | The economic landing could be harder than initially thought. We already see a tangible deterioration of the US economy, which should fall into a recession in Q2.
02 | Going forward, we think that the European banking system is strong and that current repricing will generate attractive opportunities in credit for the most stable, quality retail banks.
03 | Emerging market assets, which have been the best performers in the recent past, have not been immune to the market volatility, with some widening in hard currency debt spreads.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of March 21, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
For most of the last year, savers have been earning a reasonable return in cash. But how long can these compelling cash rates last? Historically, the answer has been: not very long. In every rate hike cycle since the 1970s, the US Federal Reserve has "paused at the peak" federal funds rate for a matter of months, not years, and history suggests the rate cuts could begin soon. Furthermore, once the Fed starts cutting its policy rate, cash rates could move hundreds of basis points lower in a very short period of time. We believe rotating from cash into short-term bonds can help investors reduce this reinvestment risk without taking on the full price volatility inherent in longer-duration fixed income exposures.
Strong fourth-quarter returns reduced US high yield spreads from 403 basis points over Treasuries at the end of the third quarter to 339 basis points at yearend. Generating positive performance with spreads at these levels is much more challenging than at the long-term average spread of 537 basis points since yearend 1996. Of course, positive performance can also potentially be generated from falling Treasury bond yields. The case for falling Treasury yields currently is built on the depth and cadence of Fed rate cuts, which we believe will be a function of decreasing service sector inflation and how much the US economy slows. Additionally, we continue to be concerned about defaults.
Megacap stock have delivered nearly all of the performance in US equity markets in 2023, and we believe the performance of these stocks relative to the rest of the equity markets is unsustainable. Apart from the megacap stocks, US valuations appear reasonable, with the S&P 500 Equal Weight Index trading at a 16x P/E ratio, in line with historical averages. As we enter 2024, we think investors will be best-served by diversifying away from megacap stocks into value stocks and reasonably priced growth stocks.
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