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Thursday 02 February 2023
Global Investment Views, Equity, Fixed income
February 2023| Markets are shifting focus away from inflation towards growth, with a slightly less disruptive economic picture for Europe and a more optimistic view on China. Intra-market rotations also materialized, with cyclical stocks favored over defensive names in Europe and tech stocks in the US supported by expectations of a less aggressive US Federal Reserve. Going forward, four themes should be crucial: (1) inflation/growth balance; (2) central bank actions; (3) dollar weakening; and (4) the corporate earnings trajectory. Any negative growth and earnings surprise could drive markets lower while there are no short-term triggers for upside at current valuation levels.
01 | Amundi Institute Insights: We think headwinds for the eurozone economy persist, but we expect growth and inflation to prove resilient.
02 | Fixed Income: We keep our marginally cautious stance on fixed income duration (core Europe and Japan, neutral US) but are vigilant regarding inflation, monetary policy, and yield movement dynamics.
03 | Equity: The likely negative effects of the rising USD last year on Q1 and Q2 corporate earnings, combined with record levels of profit margins, lead us to be cautious on mega-cap names in the US.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of January 31, 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.
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.
We believe valuations are excessive in some segments, such as mega-caps, where profit margins are also high. But the key question is whether these high margins justify current valuations? And will these companies be able to grow their top line quickly, while maintaining margins in a context of increased global competition and exhausted consumers? On the other hand, judging the direction of the economy is becoming increasingly difficult.
The strength in the US economy keeps us confident that the Federal Reserve will not begin policy cuts before the end of May, and the European Central Bank will also remain vigilant on disinflation. Sluggish growth expectations going forward mean the emphasis on quality credit and valuations will likely increase. Equities markets are continuing to display acute anomalies relative to the historical norm, with high valuation dispersion between growth and value and an extraordinary concentration in the largest securities. We are prioritizing fundamentals, and exploring strong businesses in Japan and US value sectors.
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