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Q3 2023

Capital Markets Outlook

July 2023

 

 


   

Highlights

Macro
  • After the lifting of the US debt ceiling, markets pushed through a ceiling of their own on the back of an AI-fueled rally.

  • Tight monetary policy should slow growth and eventually lower inflation.

  • Inflation Is decelerating, but the pace of progress Is slow and varies across geographies.
Rates
  • Despite some earlier pauses, central banks are continuing to hike rates, although at a slower pace.

  • Central banks have settled into a higher-for-longer regime, making a longer period of restrictive policy the likely outcome.
Credit
  • Even with refinancing at higher rates, US IG interest coverage can remain well above GFC levels.

  • High-yield companies enter the current environment in a position of strength.
Emerging-Market Debt (EMD)
  • We see select opportunities in emerging markets.

  • We still see select opportunities in EM corporates, which display attractive risk-adjusted returns over the long term, relative to developed markets (DM).
Equity
  • Japanese and US markets led regional gains; technology stocks surged

  • Ten stocks dominated US market returns in first half
 
  1. Rates
  2. Credit
  3. EMD
  4. Equity

Macro

Inflation Is Decelerating, but the Pace of Progress Is Slow and Varies Across Geographies

Headline Inflation Has Declined from Recent Peaks
CPI year over year (percent)

As of June 30, 2023
Source: Bloomberg, Office for National Statistics and AB

While Elevated, Services Inflation Peaked in the US; EU Should Be Monitored (Percent)

Through June 30, 2023
Source: Bloomberg, Office for National Statistics and AB

Food Inflation Has Started to Fall (Percent)

Through June 30, 2023
Source: Bloomberg, Office for National Statistics and AB

Current analysis does not guarantee future results.

Rates

Resilient Growth and Slow Progress with Inflation Are Forcing Central Banks to Continue Hiking

Despite Some Earlier Pauses, Central Banks Are Continuing to Hike Rates, Although at a Slower Pace
Cumulative rate hikes by country (trough to peak) (basis points)

As of June 20, 2023
Source: Bloomberg and AB

Fed: Not There Yet with Inflation

The Fed is expecting another two hikes this year; cuts possible in 2024

  • “…nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2 percent over time.” —Jerome Powell, June 14, 2023 
  • “…the risks to inflation are to the upside still.”—Jerome Powell, June 14, 2023

ECB Remains Hawkish

Focused on inflation reduction

  • “Inflation has been coming down but is projected to remain too high for too long.”—Christine Lagarde, June 15, 2023 
  • “…it is very likely the case that we will continue to increase rates in July.” —Christine Lagarde, June 15, 2023 

Current analysis and forecasts do not guarantee future results.
Market expectations measured by overnight index swaps

Credit

Strong Backdrop for Investment-Grade Credit

Even with Refinancing at Higher Rates, US IG Interest Coverage Can Remain Well Above GFC Levels
EBITDA/interest expense

As of June 30, 2023
Source: Bloomberg, Morgan Stanley and AB

Duration Component of IG Returns Can Help Mitigate Negative Impacts of Spread Widening
Global corporates OAS (percent)

Through June 30, 2023
Source: Bloomberg, Morgan Stanley and AB

Historical analysis does not guarantee future results.
IG: investment-grade; GFC: global financial crisis; EBITDA: earnings before interest, taxes, depreciation and amortization; OAS: option-adjusted spread
*Tsy Ret.: duration-neutral Treasury return

EMD

We See Select Opportunities in Emerging Markets

Emerging-Market (EM) Landscape
 

  • Hard-Currency Sovereigns: While index-level* valuations are in line with historical averages, this masks wide dispersion within the index, where selectivity continues to be crucial
  • Hard-Currency Corporates: We still see select opportunities in EM corporates, which display attractive risk-adjusted returns over the long term, relative to developed markets (DM)
  • Local Currency: We see attractive real yields in several EM local markets, as EM central banks, having raised interest rates earlier and more aggressively than their DM counterparts, are approaching or have reached the end of their tightening cycles amid signs of core disinflation
EM Corporate Sharpe Ratios Remain Attractive (2013–2023)

As of June 30, 2023
Source: Bloomberg, Haver Analytics and AB

Opportunities Are Emerging in Select Local Markets

As of June 30, 2023
Source: Bloomberg, Haver Analytics and AB

Analysis provided for illustrative purposes only and is subject to revision.
IG: investment-grade
*Excluding distressed names

Equity

Narrow Leadership Continues to Persist

S&P 500’s first-half return driven primarily by three sectors outperforming the index

Outperformers: Driven in Part by the Prospects of Easing Inflation; Healthcare Should Also Benefit

As of June 30, 2023
Source: Bloomberg and AB

Year to Date, Approximately 80% of the S&P 500’s Return Was Generated by Just 10 Names (Percent)

As of June 30, 2023
Source: Bloomberg and AB

What and How Much You Own Among the Mega-Caps Matters
Many still trade at a high premium (percent)

As of June 30, 2023
Source: Bloomberg and AB

Past performance does not guarantee future results.
P/BFE: price to blended forward earnings 
Ten names include: Alphabet Inc., Amazon, Apple, Broadcom, Eli Lilly, Meta Platforms, Microsoft, NVIDIA, Salesforce and Tesla

© AllianceBernstein L.P.