Dorval Asset Management’s macroeconomic & market scenario and exposure rates - 21 novembre 2022

Risk appetite continues to amplify on the financial markets, despite warnings from some central banks. Disinflation in the real estate sector in the US and the decrease in risk in Europe have fueled this trend.

The main central banks are likely poised to stick to their guns on rate hikes, but comments from monetary policy committee members show that they are no longer singing from the same hymn sheet. For example in the US, some members of the Fed seem to see 5% as the highest point for leading rates in 2023, while others view this figure as a minimum. For now, the markets are expecting the doves to win out on the back of clear disinflation anticipated for 2023.

This is a risky bet, but the latest inflation statistics on new rents are encouraging in this respect. In October, this inflation seems to have returned to pre-Covid levels according to smoothed data from Zillow, and has already even moved into negative territory according to Apartment List (cf. chart 1). These figures will only gradually trickle through to the consumer price index in 2023, as it incorporates all rents and not just new rents. The real estate component accounts for 42% of the US core CPI, so this is a huge challenge. However, it is worth noting that the weighting of real estate in the consumption deflator – a key indicator for the Fed – is much lower, accounting for 18% of the core deflator.

 

Slowing inflation for new rents in the United States
MoM changes, annualized rates

New rents (source Zillow) / New rents (source Apartment List)

 

Meanwhile in Europe, a warm Fall season, energy savings, massive imports of LNG and strong fiscal support are now helping ward off disaster scenarios for the winter ahead. Sentiment on the European economic outlook therefore probably hit a low in October, as attested by the clear rebound on the ZEW index in November (cf. chart 2). The upturn in European equities is therefore warranted by this decrease in risk, although major uncertainties remain. However, a brighter outlook for the European economy would mean that the ECB’s rates could hike further than the market currently expects for 2023, lending further credence to an approach that steers clear of euro area sovereign bonds in our view.

 

Rebound in perception of German economic outlook in November

 

 

In our international flexible funds, we maintain our strong investment focus on money-market assets, which benefit from hikes to central banks’ rates, along with moderate and highly diversified equity exposure. Our bond exposure remains low, and duration is slightly negative in Europe (short position on German 5-year) and slightly positive in the US (long position on US 30-year).

 

 

 

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