Horizon Q3│2023

Prof Dr Bernd Meyer and team provide an outlook for the 3rd quarter of 2023 in the current Horizon publication.

Key statements of the outlook

Surprisingly robust

Equities gained somewhat in Q2 despite high economic uncertainty and investor scepticism. Buying by systematic investors was supportive, but now makes the market more vulnerable to setbacks. AI euphoria boosted individual stocks; market breadth was low.

Inconsistent markets

Weakness in commodities, small caps, emerging market and cyclical equities, as well as priced-in Fed rate cuts, reflect market expectations of further economic weakness. Optimistic earnings expectations and high equity valuations do not fit the picture.

Caution required

Liquidity withdrawal looms in H2. Only with a view to an upswing on both sides of the Atlantic in 2024 do equities offer fundamental potential. Commodities, on the other hand, are already pricing in significant economic weakness. Bonds offer hedging and attractive yields.

With declining inflation and the problems of individual banks, investors' focus shifted from inflation to economic growth early in the second quarter. Uncertainty about this dominated with the discussion about the US debt ceiling and disappointing economic data from China and Europe. Investors remained sceptical, favouring large caps, defensive stocks and developed equities. Equity funds saw outflows. Nevertheless, US equities in particular continued to rise. Better-than-expected Q1 corporate results helped, as did AI euphoria, which boosted individual mega caps. However, the main drivers may have been rule-based investment strategies, as more momentum indicators turned positive, implied and realised equity volatilities fell and a negative correlation of equities and government bonds returned with the focus on growth. All of this favoured the build-up of equity positions through rule-based investment strategies.

What's next? The slow decline in core inflation and the robust labour market in the US should allow the Fed to keep interest rates higher for longer. Although the market has already retreated somewhat from the expectation of rapid, significant rate cuts, it is still pricing in more than 130 basis points lower US central bank rates for the end of 2024. However, this is only likely to happen in the event of a more pronounced economic slowdown. The stock markets, on the other hand, seem to be betting on an economic recovery. But if interest rates remain higher for longer and the yield curves remain inverted, this is likely to leave further marks, as already seen in the real estate market, at regional US banks or in the form of tighter credit conditions, falling demand for credit and weaker consumer confidence. Economic risks remain high. In addition, declining net liquidity is likely to become a headwind. The US government's exhaustion of all cash holdings since reaching the debt ceiling in January and support measures by the Fed after the Silicon Valley Bank failure have increased liquidity despite quantitative tightening. Now that the debt dispute has been settled, spending cuts and a significant withdrawal of liquidity are likely to weigh on markets. In addition, the risk of rising US unemployment and, therefore, fewer ETF inflows remains. The higher equity positions of systematic strategies make markets more vulnerable. In the event of a rise in volatility or a more positive correlation between equities and bonds again, e.g. due to the withdrawal of liquidity, these may be forced to reduce equity positions in a falling market. Caution therefore remains the order of the day. The upside potential seems limited for the time being given the multitude of risks and simultaneously increased valuations. However, with a view to a coinciding economic upswing on both sides of the Atlantic in 2024, we see longer-term potential for equities. Still, we expect better entry levels in the second half of the year.

In the Insights interview, our fund manager Javier Garcia explains what excites him about Asian emerging market equities, where he sees opportunities and what distinguishes the Berenberg Emerging Asia Focus Fund. I wish you an exciting read.


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