Building up capital

Monthly Market Review: What's new in the financial markets?

Thierry Masset, Chief Investment Officer reviews the economic and financial news. Every month, he analyses events that have impacted the financial markets. The context of any potential stock market fluctuations is equally scrutinized.

  • Diversification has been challenging, with positive stock/bond correlations through 2022. But falling inflation should reverse this trend in 2023 and investors may want to add bonds to their portfolios for additional diversification benefits. Even if a recovery won’t be smooth with the threat of recession looming, the fixed-income market now seems to price much of the ongoing monetary tightening cycle. In this context, we keep our preference for good credit quality bonds (“investment grade”) over lower quality bonds (“high yield”).
  • As companies with high labor costs and low margins seem vulnerable after their bounce along with cyclicals, we prefer to focus on defensive stocks, especially those with low volatility and high dividend yield (such as Health Care), and value stocks (such as Financials which are boosted by higher rates).
  • As the specter of recession and demand destruction in large energy-consuming parts of the world may continue to dominate near-term commodity market sentiment, we decided to reduce our exposure on commodities from overweight to neutral, by taking profit on Energy.

Bonds

World says goodbye to negative-yielding debt

As central banks rush to tighten monetary policy – according to Bloomberg, their average rate will peak at 6% in the third quarter before ending 2023 at 5.8%, the highest since 2001! – in response to inflation pressures, the total market value of negative-yielding debt worldwide dropped to zero!

Commodities

Europe’s natural gas prices are plummeting as abnormally mild weather is reducing demand

As gas reserves are robust and prices are back at pre-war levels, Europe might be in a better position compared to previously feared. But it is not out of the woods yet! To ensure smooth stockpiling in the summer, a lot of factors must align, including solid electricity supply from wind, nuclear and hydro generators, stable LNG flows and continued energy savings.

Stocks

Europe records its biggest outperformance on record versus the US

After years in the wilderness, European stocks are finally getting their act together, just when the US Big Tech keeps drifting lower and lower. European stocks have recorded their biggest outperformance on record versus the US in the fourth quarter.

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