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The war in Ukraine has not caused an energy crisis in Europe. Inflation rates in the established industrialised nations are declining slowly but steadily. Germany’s predicted winter recession never materialised, while China’s growth engine is once more in motion. Are we about to enter a period of tranquillity? “Not at all”, says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “Political risks are significant, and a recession is still likely.”

The economy has been performing fairly well compared to the dour predictions of a few months ago. The German economy just escaped a recession in the first quarter of 2023, and the eurozone experienced modest growth. Core inflation remains comparatively high, but overall inflation has decreased from more than 10% last autumn to slightly under 8% most recently.

So, all is well once again? Not exactly. “There are still significant risk factors”, Gerlinger warns. For instance, the economy will not feel the impact of rising key interest rates immediately. They are a burden on growth, but the question is how much and for how long? “In addition”, Gerlinger adds, “the pandemic-related catch-up effects on consumption will eventually run out.” The additional savings from the corona era, which have so far helped to stabilise the economy, have been depleted.

Therefore, growth predictions for the advanced industrialised nations are moderate; the International Monetary Fund anticipates a halving to 1.3% this year. To be sure, China’s growth is accelerating dramatically, and India’s growth remains exceptionally robust. “While this will support global growth, it will not be able to prevent a recession”, Gerlinger predicts.

The political element is exacerbating the strain caused by the economic aspect. In the United States, for instance, the disagreement between the administration and the opposition over lifting the debt ceiling could be a major midsummer concern. The war in Ukraine remains a source of instability, and the West’s backing of Ukraine reduces fiscal policy leeway. Additionally, the “great power rivalry” between the United States and China continues to be the main geopolitical problem: Will Taiwan-related tensions escalate? Will the USA, just like it has done with Russian shares, eventually outlaw trading in Chinese shares? Does the frequently recommended overweighting of Chinese equities make sense in light of these factors?

Since no one is certain how many significant risks are concealed in the balance sheets of US banks, the turbulence in the financial sector could flare up again at any time. Investors were stunned in March when Silicon Valley Bank was forced to shut down.

In light of these obstacles, stock markets have been relatively stable thus far. Mixed signals have had no adverse consequences. The banking sector’s turmoil in March was handled with relative ease. “The corporate reporting season is not a burden either”, says Gerlinger. In the past few weeks, expectations had already been drastically lowered. Lastly, the large number of short positions may not only support the market but may even fuel it if prices rise further; specifically, if the short positions suddenly need to be covered, triggering buying.

Tensions on the bond markets also remain elevated. It is unclear how the central banks will assess the situation on inflation following the modest interest rate changes in May. “We are seeing a further modest increase in yields at the very short end”, Gerlinger points out. “On the long end, however, not much more will be coming.” The topic of a recession is gradually gaining prominence and will manifest fully at the end of 2023/beginning of 2024, putting pressure on yields.

There is a great deal of uncertainty about the development of inflation and, by extension, the path of key interest rates, increasing risks and opportunities for the economic outlook and ultimately corporate earnings. Add to that a multitude of political tensions. “One thing above all is certain”, Gerlinger asserts: “There will be no time for boredom any time soon.”

Read the Cash Online report by Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM: Here.