The economic traffic lights continue to show red. The US has been in a technical recession for two quarters and may slide into a classic recession. China, hampered by a real property crisis and anti-corona measures, has lost its role as an economic engine. In Europe, the emerging recession is likely to turn out even more severe than in the US, as the rise in energy prices is significantly higher. “The only encouraging aspect right now is that global supply chains are slowly easing”, Gerlinger highlighted.

Inflation is the big problem. In the USA, the wage-price spiral is turning and could soon reach its peak. In Europe, the inflation rate is expected to rise to just over ten per cent. Central banks are responding by raising interest rates: The US Fed has made it clear that it is prepared to accept a recession while the ECB is following suit.

So what does this mean for investors? “Gold, an otherwise classic inflation protection investment, is currently unattractive”, said Gerlinger. “Both the strong US dollar and rising interest rates have weighed on the price recently.” Against the backdrop of an expected recession, the long maturity is becoming more interesting for bonds in the US. In Europe, the long maturity is caught between persistently high inflation and the risk of recession.

“We are taking a two-pronged view of the bond side”, Gerlinger pointed out. “On the one hand, we expect yields to rise significantly in the short maturity segment in view of the most recent statements by central banks. Accordingly, we are expanding the segment with another floater position. The long end, however, should gradually benefit from the prospect of a recession, which is why we are building positions in the US bond market in this maturity segment.” In corporate bonds, yield levels do appear attractive. “The spread, however, does not currently reflect the risk of recession”, Gerlinger added.

Fed policy is dominating prices on the US stock market. While valuations have fallen significantly, they continue to be above the long-term average. In particular, the growth segment remains vulnerable to a further rise in yields. “The current uncertainty argues for balanced positioning between value and growth”, said Gerlinger.

European equities remain more favourably valued than US equities. The rise in energy prices and the economic outlook, however, do not favour the highly cyclical industry in Europe whereas the US is better positioned. Small caps are suffering disproportionately from the uncertainty. Current sentiment is very negative. In Europe, the UK continues to be relatively attractive. Due to its index heavyweights in banks (benefitting from rising interest rates), health care (defensive sector) and commodities, the market offers better opportunities than Euroland.

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