Equities

When complexity collapses, it is a red flag for impending tail-events, heart attacks, and reversals in the markets. We describe how to measure complexity, how to spot the red flag that it has collapsed, and list some investments that are approaching potential turning-points.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.

This week we are sending you a Style Chart Pack, which now includes a standalone macro section, as well as macro, fundamentals, valuations, technicals, and uses of cash charts for the S&P 500, Defensives vs. Cyclicals, Growth vs. Value, and Small vs. Large. In the front section of this publication, we will review recent equity performance, and attempt to answer real estate sector-related questions that are foremost in investors’ minds.

Colombian assets are inexpensive, but they are cheap for a reason. The economy is entering a growth recession while inflation will remain sticky and above target. Further, President Gustavo Petro’s policies will lead to lower investment, rising political volatility, and public debt deterioration. Continue underweighting Colombia across all asset classes.

We think the banking turmoil set off by Silicon Valley Bank’s failure will prove to be less than it’s been cracked up to be and that it will not derail the near-term equity we expect.

Is the European banking system hiding nasty surprises? How will the recent stress affect European growth and the ECB’s policy outlook?

High rates have hurt real estate and, now, banks. The next shoes to drop: Loan growth, profits, and employment. Stay defensive. Recession is probable, but risk assets have not priced it in.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

In Section I, we discuss the implications of the banking crisis that emerged in March. We do not expect what happened in the US or Europe to morph into a full-blown meltdown of the financial system, but this month’s events will likely lead to a further tightening in bank lending standards, raising further the odds of a US recession over the coming year. We continue to recommend an underweight stance toward risky assets versus government bonds over the coming 6-12 months, and defensive positioning within a global equity portfolio. In Section II, we estimate the impact of recently-passed US legislation on US business investment over the structural horizon and conclude that it will indeed boost capex growth over the coming several years. Assets poised to benefit from this trend will likely underperform over the coming year but should be bottom-fished following the next recession.