Quarterly Market Outlook: Q3 2023

After the calibration phase of the most accelerated process of interest rate hikes in recent decades, it is time for central bankers to ask themselves: is the dose of monetary tightening sufficient to bring inflation back on target, or is there still some more work to be done? Most of the sources of inflationary pressure seem to have been stifled, but price pressures in services still persist in a tight labor market environment. We believe that inflation concerns will gradually shift to growth and that, during the third quarter, interest rates will reach their highest levels. The process of rate cuts will begin soon in the emerging bloc, but in developed economies we will probably have to wait until 2024. The economic adjustment is very moderate and we do not believe that the signs of economic slowdown justify an abrupt pivot in monetary policy. The adjustment process is moderating and lengthening over time.

This environment of a prolonged pause in interest rates and a smooth and gradual adjustment of the economy is favorable for the repositioning of investment portfolios (attractive yields and diversified sources of return). Moreover, we are witnessing an extraordinary momentum in technology (Artificial Intelligence) and energy disruption opportunities. The pause in interest rate hikes is a good time to reposition investment portfolios.

01. Pausing soon (but higher for longer)

Price pressures are clearly on a downward trend but work remains to be done on the core and services inflation fronts. This, coupled with a high dose of monetary tightening already in place, should allow central banks to justify a pause in rate hikes. However, rate cuts will be delayed until the cooling of the labor market becomes more evident. This sets up a scenario of higher rates for longer than expected by the market. It is a most delicate moment for central banks and-in the balance of doubts about potential errors- we believe that the pause is the best decision to make during the third quarter of 2023.

The upward adjustment of interest rates by central banks has been notable for its magnitud and speed. Emerging countries have been on pause for months now. Now it is the turn of the developed.

Source: Bloomberg WIRP (for developed countries) and Bloomberg Economic Forecasts (for emerging countries). Data as of 6/30/2023

02. A moderate and staggered adjustment

Economic growth was surprisingly resilient in the first half of 2023. In the meantime, major geopolitical and economic risks have been removed or have at least diminished. We have revised up growth estimates for 2023 but the bad news is that the slowdown is shifting to 2024 and economic growth will remain anemic for some time. We are witnessing a very moderate and staggered economic adjustment relative to other monetary tightening cycles. Our view is moderately optimistic (low growth and a low probability of crisis or high intensity adjustment).

Evolution of GDP forecasts for 2023 and 2024

Source: Bloomberg Economic Forecasts. Data as of 6/13/2023

03. A more balanced environment

We believe that this macroeconomic scenario (high rates and moderate economic adjustment) combined with attractive valuation levels creates a favorable environment for the construction of diversified portfolios. A pause in rate hikes has historically been an ideal time to invest in fixed income instruments. In addition, some segments and geographies of the equity markets are trading at attractive multiples, and we are witnessing very promising disruption opportunties in AI and energy transition.

Current yields on assets have improved considerably in the last 18 months

Source: Bloomberg. Data as of 06/13/2023

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