Divergences persist: US resilience vs China weakness

Thursday 07 September 2023

Global Investment Views, Equity, Fixed income

   

Divergences persist: US resilience vs China weakness

September 2023 | If the recession in the US plays out as feared, both earnings and margins would come under pressure. The fiscal boost from the government has helped consumers, but we think excess savings could dissipate. We believe markets, which are priced for perfection, don't reflect this risk. On the other hand, valuations in some pockets are expensive vs others, making this an attractive market for active management.

01 | Although we revised up our 2023 US growth forecasts from 1.6% to 2.1%, we still think that a (mild) recession from Q1 is possible, due to the lagged effect of tightening financial conditions and dwindling excess savings.

02 | We remain active on duration, with a slightly positive view on the US and a close to neutral/slightly cautious stance on Europe.

03 | US and EU equities still show high valuations despite the recent pullback. If our scenario of a mild recession plays out, this could be negative for equities, especially US large caps, growth and tech.

Global Investment Views - Divergences Persist

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of September 04, 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.

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In developed markets, we move to neutral from positive on Japan and we see scope for rebalancing in favor of the UK, European small caps and the US. While the US is displaying strong earnings, we believe Europe should benefit from the moderately resilient economic environment and rate cuts. In government bonds, we are positive on the US and core Europe, along with Italy. In credit, valuations in Euro investment grade appear attractive. We also look for selective opportunities across emerging markets and see oil as providing protection from geopolitical risks.

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Searching for bright spots in a trickier phase

Recent inflation and growth data from the US indicates continued strength in the economy, leading Amundi and various institutions including the International Monetary Fund, to revise US growth forecasts upward. We believe current strong momentum will continue into Q2, but expect a deceleration in H2. Inflation data also points to stickier prices, with upside risks, especially around oil, from the recent geopolitical escalation, opening a difficult phase for central banks. We expect fewer rate cuts but higher uncertainty around policy actions.

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The late-cycle environment continues to play out

Stocks are pricing in a rosy scenario in terms of economic growth, which has led to strong upside already this year, with some broadening of the rally evident recently. These movements are further aided by ample liquidity and robust earnings, particularly in the US. The messaging from the Fed and the ECB has been focused on how important it is for inflation to come down for them to reduce rates, even though the debate continues on whether the neutral rate has moved higher.

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