Market Insights
April 2023

The legendary investor Peter Lynch once said, “Although it’s easy to forget sometimes, a share is not a lottery ticket…it’s part-ownership of a business.”

This quote emphasizes the importance of focusing on the underlying fundamentals of a company. Last month, we saw mixed equity markets, with some sectors and companies experiencing significant gains (US Consumer Staples +2.94%, US Healthcare +2.12% and EU Luxury +3.09%), while others struggled (US Industrials -1.22% and EU Auto -2.55%).

The quote of Peter Lynch also illustrates the importance of companies’ earnings. Since last month, all eyes are on the Q1 reporting season in the US. Q1 is expected to register a decline in YoY earnings growth for the second consecutive quarter, fulfilling the conditions for an earnings recession.

Another parameter of current stress in the markets is the US debt limit which is being reached faster than expected. Weak tax collections in April suggest an increased probability that the limit will be reached in the first half of June. This would raise the possibility of a short-term ceiling extension, but it all comes down to the US Congress being able to reach an agreement – which is not very likely. The 1yr CDS on the USA reached an all-time high of 176 basis points higher than some HY corporates!

Most global central banks may be either close to a peak or already done with interest-rate hiking. May could cement a turn in what has been the most aggressive global tightening cycle seen in decades. A soft March CPI YoY (down from 6% to 5%) and PPI YoY (down from 4.6% to 2.7%), coupled with weak retail sales (-1.0%), is reviving talks that the inflation battle has been won.

The commodities complex has started to price in a weaker economic activity with industrial metals and energy prices softening during the month of April. The war in the Ukraine and supply constraints seem to be less of drivers for higher prices as well as the slower than expected reopening of the Chinese economy. This is partially helping inflation prices to continue its decline and should be supportive for the FED to achieve a soft landing and avoid a severe US recession.

However, the fight between Bulls and Bears is still ongoing and investors expectations continue to be divided about the outcome of the current slowdown.