Capex

European markets have room to rebound in the coming weeks, however, a recession looms. What are the lessons from history that investors can use to position themselves under these conditions?

Europe’s weak patch is not about the ECB’s policy tightening, at least not yet. 2024 is another story, and the ECB’s policy will prompt a Eurozone’s recession around the summer.

US monetary policy is restrictive, as evidenced by a falling jobs-workers gap. The reason that unemployment has not risen is because labor demand still exceeds supply. That will change in the second half of 2024 when the US economy succumbs to recession. Investors should increasingly favor bonds over stocks.

The global energy transition will become more disorderly, if oil-and-gas capex growth continues to outpace that of critical minerals. We remain long exposure to the equities of oil and gas producers via the XOP ETF; the COMT ETF to retain direct commodity exposure, and $100/bbl December 2024 Brent calls. Slower supply growth of metals facing off against steadily increasing demand also favors exposure to metals miners and refiners via the XME ETF.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

Bulls and bears have capitulated, and the majority of the clients surveyed expect a rangebound market in the near term. Our fair value PE NTM indicates that the S&P 500 is only modestly overvalued. The continued outperformance of the Magnificent Seven faces multiple hurdles. Meanwhile, fiscal spending is unlikely to create an impetus for another leg up in equity performance.

The ECB is done lifting interest rate for the cycle and its next move will be a cut next year. Yet, European rates will climb even higher in the second half of the decade.