Europe

The world economy is likely already in recession, defined as world growth dipping to sub-2 percent. So far, the world recession has been China-led, but in the coming months it will change to being developed economy-led. Hence, while metals and industrial commodities may get some brief respite, high yield credit and stocks will underperform government bonds. New tactical recommendations are to overweight French luxury goods versus US tech, and to overweight USD/COP.

Recession is on track to start around year-end. Stocks usually peak shortly before recession begins. So, position defensively but be prepared for a few more months of the rally.

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 reiterate why a soft economic landing remains improbable in the US. Some reasonable estimates of the level of excess savings point to their depletion in a year’s time, but other estimates indicate a much earlier end point. We interpret this evidence, as well as other indicators, as pointing to an earlier rather than later US recession if the current stance of monetary policy is maintained or tightened further. In Section II, we provide an update on the US housing market. We acknowledge that permanent site residential structures investment may begin to contribute positively to US real GDP growth if the recent pickup in housing starts is sustained. But the recent housing market data is symptomatic of a negative housing supply shock that is far more consistent with the “no landing” economic scenario than the “soft landing” scenario that stocks are betting on. We continue to recommend that investors position their portfolios conservatively.