Horizon Q2│2023

Prof Dr Bernd Meyer and team provide an outlook for the second quarter of 2023 in the current Horizon publication.

Key statements of the outlook

Higher for longer

The more robust economy and steadier inflation entail the risk of higher central bank interest rates for a longer period of time and thus an ultimately heavier strain on the economy. Therefore, uncertainty about growth and inflation remains unusually high.

Less attractive

After the good start to the year, equity valuations are higher again, also because earnings expectations have been further reduced, and investor sentiment and positioning are less pessimistic.

Tough until autumn

The recently bumpy phase is likely to continue, as equities are already pricing in an economic recovery. Investor positioning, however, still argues against a sharp downturn. We are more defensively positioned with a higher bond allocation than at the beginning of the year.

Dear reader,

The financial markets initially got off to a flying start to the new year as better-than-expected economic data and falling inflation met pessimistic investors. This boosted bonds and especially equities. European stocks were ahead. In fact, we had expected a better year, with equities recovering into 2023 after bottoming out in the second half of 2022. However, the strength in January also surprised us, as the potential of equities is limited due to a lack of potential for a significant increase in valuations and a lack of earnings growth. Thus, European stock indices were already approaching our year-end targets at the beginning of February, even though our targets were already optimistic compared with competitors. The rally then stalled from February onwards as bond yields rose again. With higher-than-expected growth and inflation, central bank interest rates look set to stay higher for longer, with the risk of a significant economic slowdown in the medium term.

Inflation and the expected central bank policy thus continue to determine financial market developments – equities and bonds are largely moving in tandem. Headline inflation, however, should fall more sharply in the coming months thanks to base effects. It will be interesting later in the year to see how far inflation will ultimately fall – it could remain higher than many think in the medium term. We therefore expect investors to temporarily shift their focus to economic growth. China should provide a tailwind here in the coming months. For the US, the key questions are how severe the downturn will be in the second half of the year and what distortions the debate about raising the debt ceiling will create. Europe is caught in the middle and seems to be scraping close to a recession at the moment. We expect a recovery from spring onwards. Uncertainty about growth and inflation, however, remains above average in view of the many risks, the longer-term higher central bank rates and the continuation of the war in Ukraine.

After the good start to the year, markets could thus experience the classic seasonal pattern of a weaker summer – especially since equity valuations have risen (partly because earnings expectations have been reduced) and sentiment and positioning are less pessimistic. Equity markets are already pricing in a global economic recovery in the second half of the year, while risks to the economy increase with prolonged high central bank interest rates, as the recent problems of individual regional US banks already show. Accordingly, we reduced our equity allocation, which had been neutral or overweight since September, to a slight underweight in favour of bonds towards the end of February. Our focus for equities remains on Europe and the emerging markets. Commodities have become more attractive since the beginning of the year.

In the Insights interview, our portfolio manager Robert Reichle discusses why emerging markets excite him, how his team works and why emerging-market bonds are currently attractive. I hope you enjoy reading this issue of Horizon.


Prof. Dr. Bernd Meyer
Chief Investment Strategist and Head of Multi Asset
Phone +49 69 91 30 90-225