Dear Investors,
Wellington Management – The global economy has been more resilient than expected
“We continue to expect tighter credit conditions and restrictive policy to take a toll on the economy.”
Japan remains our top developed equity market
“Japanese companies are benefiting from inflation, monetary policy remains easy compared with other developed markets, and shareholder activism is improving corporate governance.”
“We have lower conviction on our China overweight given the debt overhang in the property market and consumer skittishness.”
Breakout of generative ai
“The global economy has been more resilient than expected, but we think recession is delayed, not defeated.”
“In hindsight, the effects of tighter monetary policy were offset by excess savings, tight labor markets, the relative insensitivity of consumers and businesses to higher interest rates, and the breakout of generative AI.”
“But these positives are now more than priced into equity valuations, and looking ahead, we see central banks continuing to hike rates and squeeze the economy.”
Equities market
“Equity markets have gained ground this year despite the rise in real yields and conflicting signals from manufacturing and services activity indicators.”
“While we’ve seen some cyclical disinflation, tight labor markets and robust consumption in many regions suggest there is still insufficient slack in the system to move core inflation sustainably back to target.”
“Consequently, we expect the emphasis on tighter monetary policy to remain in place, further slowing the economy.”
“This makes it hard to rationalize the equity market’s gains year to date, all of which derive from forward multiple expansion rather than an increase in earnings growth expectations.”
“Similarly, the growth segment of the market has outperformed the value segment, despite the negative historical relationship between the growth factor’s relative performance and rising rates.”
Fixed income update
“The market’s repricing makes US government bonds more attractive than European and Japanese government bonds.”
“The Fed’s tightening campaign should benefit longer US maturities, which also continue to see robust demand from insurance companies and pension funds.”
“Europe is still earlier in the hiking process and inflation is higher than in the US. As noted, we believe any tightening in Japan will be gradual.”
Inverted yield curve
“We are at the late stage of the credit cycle, characterized by an inverted yield curve, tighter credit conditions, and deteriorating fundamentals.”
“Historically, these conditions have been reliable indicators of negative excess returns relative to government bonds over the following 6 – 12 months.”
US bankruptcies
“We think high-yield spreads should be at least 140 basis points (bps) wider than the current +430 bps spread, given the risks described earlier.”
“We expect investment-grade credit to outperform high yield in this environment, yet high-yield spreads tightened during the second quarter while investment-grade spreads were relatively unchanged.”
T.Rowe Price – German & China Update
Minutes reveal hawkish fed outlook
“The minutes revealed that, while the decision not to raise rates in June was unanimous, some members would have preferred another increase.”
“Markets began pricing in a roughly 44% chance of two or even three quarter-point hikes by December, according to the CME FedWatch Tool.”
Signs of weakness in the german economy
“German data for industrial production, factory orders, and exports pointed to continuing economic weakness in the second quarter.”
“Output in May fell 0.2% versus April, disappointing consensus expectations that had called for industrial production to come in flat.”
UK house prices fall sharply as mortgage rates rise
“Rising mortgage rates continued to take their toll on the UK housing market in June. House prices fell 2.6% year over year, according to home loan provider Halifax.”
“This marked the largest such decline since 2011.”
Chinese equities
“Chinese equities retreated as the latest economic data raised concerns about the country’s sputtering post-pandemic recovery.”
“The private Caixin/S&P Global survey of manufacturing activity eased to 50.5 in June from May’s 50.9 as expansion of manufacturing output and new orders softened.”
“Index readings above 50 indicate growth from the previous month, while those under 50 denote contraction.”
“The Caixin survey of services activity fell to a lower-than-expected 53.9 in June from 57.1 in May, its sixth successive monthly expansion but lowest reading since January.”
“The weak Caixin data were in line with the official Manufacturing Purchasing Managers’ Index, which contracted in June for a third consecutive month.”