Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, discussed the outlook in 2023 and where investors should put their money. 

Benjamin Melman at Edmond de Rothschild Asset Management favours China’s equity market, as it benefits from the support of the authorities and lacks inflationary pressure.

“Despite a slower-than-expected recovery in activity and still unstable geopolitical environment, China is benefiting from the support of the authorities and the absence of inflationary pressure,” he said in a statement. 

He also favours the healthcare theme, a sector that is distant from the current problems and benefits from relatively attractive valuations and favourable prospects, as well as that of the energy transition.

Nevertheless, overall, he prefers to be a little more cautious on equities. “Even if there was no contagion from the banking crisis, the tightening of lending policies, which is likely to follow, increases the risk of recession. We cannot rule out the fact that the very strong monetary tightening of recent quarters has caused other damage than the aforementioned liability crisis,” he said.

Central banks keep some options open 
Both the Fed and the ECB maintain a bias towards monetary tightening, but following their last monetary policy committee meetings, they reserve the option to wait. “They do not intend to ease monetary policy, especially in a context where inflationary pressure remains high. However, as of June, the market anticipates a cut of 80 basis points in the Fed’s key rate up to January,” he continued.

This pricing shows that investors are not counting on a single scenario, but are probabilising the risk of contagion from a banking crisis that would likely lead to further rate cuts. “Schematically, either the banking crisis is absorbed and the Federal Reserve has no reason to cut rates in the coming months – it could even increase them a little further – or the crisis spreads and major rate cuts will have to be considered,” he said. “The volatility of interest rates, which had risen sharply in previous weeks, therefore has all reasons to remain high, as current anticipations do not correspond to any credible equilibrium given the current persistence of inflation,” he added.

The very sharp easing of yields on the curve during the banking crisis protected all or part of the negative effect on performance of the widening of credit spreads depending on the type of instrument. “The return to a higher level of interest rates therefore offers protection again: if we were to enter a banking crisis, the associated credit crunch would most likely resolve the short-term problem of too high inflation in just a few months,” he said. “We therefore continue to favour the carry theme in our allocations. We will revise our decision in the event of continued bank contagion or excessively drastic rationing of bank lending,” he added.

Competition from money market funds 
In the United States, over the past year, deposits with banks have fallen by $700 billion, almost 4 per cent, largely in favour of money market funds, which have increased by €557 billion ($605 billion), due to the higher returns than deposits combined with very high liquidity and security. “Given the recent rise in money market rates, and the lack of urgency may be felt by large banks to pay significantly more on their deposits, especially as they benefit from transfers of deposits from small banks, it is likely that this trend will continue,” he said.