Exposure rates of the Dorval Asset Management Range – 25th March 2022
March’s euro area consumer confidence survey took a sharp plunge as a result of worries on the war in Ukraine and soaring energy prices, with the index visiting showings on par with a recession. However, the situation is offset by state support, hefty savings and a sturdy labor market (cf. chart 1).
Very challenging shock for households but not yet a recession
Consumer confidence index / Unemployment rate in the euro area
Looking to corporations, the latest PMI surveys appear to be holding up well, with the euro area composite index down slightly to 54.5 vs 55.5 in February. Services are naturally more resilient than manufacturing on the back of easing health restrictions, particularly in France. Across the pond, US PMI stats have even picked up the pace in March for both services and manufacturing, reflecting the country’s relative insulation from the effects of the war in Ukraine.
However, this resilience should not overshadow the severe deterioration in the outlook, as suggested by the German Ifo index: projections have plummeted, as they are much more sensitive to sentiment than to the objective reality of order books (cf. chart 2).
Activity is resilient but projections plummet
German Ifo business climate index
Current situation / Russian invasion of Ukraine / Projected situation
None of these figures come as a massive surprise, particularly in the United States where economic activity is still robust, and the inflationary impact of the energy shock is more of a concern than its recessionary effects for now. Federal Reserve Chair Jerome Powell has taken note of this and declared war on inflation with his speech and program entitled “Restoring price stability”, paving the way for short-term rate hikes in 50bps increments if necessary. The bond market has now taken on board a jump in short-term rates to almost 3% in a year (cf. chart 3).
War in Ukraine has not kept a lid on rate hikes for long
US 10-year / UK 10-year / German 10-year / Russian invasion of Ukraine / J. Powell’s “Restoring Price Stability” speech
The equity markets have fairly easily digested both the deterioration in the macroeconomic environment and the interest rate hike. Risk appetite as measured by Goldman Sachs has staged a sharp rebound since the start of March (cf. chart 4), marking perhaps the inverted mirror image of excessive anxiety in February, cautious investor positioning and stronger relative equity valuations as a result of the ongoing impossibility of investing on the bond market.
Risk appetite (Goldman Sachs index)
In view of the current complex environment, our international strategies maintain a focused allocation concentrating on two theme-based baskets comprising developed markets equities on the one hand and cash and equivalents on the other.