Europe
In Section I, we audit the market’s “soft landing” narrative in response to a meaningful challenge to our cautious stance from recent financial market developments. We acknowledge that US economic growth was stronger in the first half of the year than many investors expected, but we are unmoved by the recent uptick in “soft landing” hopes. A “soft landing” outcome very likely necessitates interest rate cuts before recessionary dynamics emerge, and it is far from clear that rate cuts or (especially) an easy monetary policy stance are likely to materialize over the coming year. As such, we continue to believe that conservative portfolio positioning is appropriate. In Section II, we discuss some simple approaches that we use when valuing the major asset classes that we cover. We conclude that global ex-US equities and ex-US developed market currencies are the main assets that can be considered “cheap” today.
Among the critical materials needed for the global energy transition, Li is expected to see the largest increase in demand from 2022 to 2050. Li supply is not constrained, but continued investment in mining and refining will be required to meet increasing demand. We expect strong Li-ion battery demand in the major economies of the world – the EU, US and China – will keep a bid under Li, and allow growing supply to find a home. At tonight’s close we are getting long the LIT ETF, consistent with our view.
The snap election which took place on Sunday resulted in a political deadlock in Spain. No single party has won enough seats to form a government. More importantly, both the left-wing bloc and the right-bloc fell short of the 176-seat majority needed in the 350-seat lower house. Negotiations are taking place as we publish, but neither side can see a clear and straightforward path to form a working government. Spain is heading into a political deadlock.
In this report, we present our performance review of the BCA Research Global Fixed Income Strategy (GFIS) model bond portfolio for the Q2/2023, and the outlook and scenario analysis for the next six months. The portfolio return exactly matched that of the benchmark index during the quarter, as modest gains on government bond allocations in the US, UK and core Europe completely offset losses on spread product underweights. Looking ahead, the portfolio is positioned to capitalize on an expected slowing of global growth over the rest of the year through an overweight stance on government bonds versus spread product and above-benchmark duration tilts in the US and core Europe.
We see challenges ahead for Global Buyout across geographies as valuations need further resetting. While we are concerned with capital controls and flight risk in Asia-Pacific Venture Capital, the upside potential from AI may be worth a look. The current entry point for Private Credit is opportune across North America and Europe with the distressed pipeline building. Real Estate does not look appealing with the macro and relative opportunity set driving our underweight. Hedge Funds have a favorable backdrop in the near-term, although prospects differ across Directional, Diversifier, and Crisis Risk Offset strategies.