A fortnight ago, Dutch private bank InsingerGilissen sold a pack of high yield bonds to increase its holdings in investment grade bonds. The bank does not rule out that it will do so again in early 2023. “If you expect risks, there will be a storm in the high yield segment as well,” chief investment officer Gerwin Wijnia told InvestmentOfficer.nl.
InsingerGilissen, the Dutch unit of Luxembourg-based Quintet Private Bank, is overweight in investment grade corporate and government bonds, and neutral in high yield. “We have reduced that position,” said Wijnia. “We made a switch from equities and cash into bonds, and within bonds a switch out of high yield, into quality.”
In talking about “the storm” that could also arise in the high yield segment, Wijnia referred to the expected recession in Europe on which an increasingly broad consensus is emerging. That recession will have an impact on the loans of more risky companies, and on equities.
Growing convinced
“Over the last few weeks, I have become even more convinced in our cautious view on equities,” said the CIO, referring to the lowered analyst expectations on earnings per share for 2023 that are for both the US and European markets.
“In Europe, you are now talking about a small percent growth over all 2023, with a recovery expected only in the second half of next year. That lends support to our underweight position. I’m glad we made this adjustment earlier in the third quarter.”
Within equities, InsingerGilissen has been “heavily overweight” the Americas and “strongly underweight” Europe since the summer. “Not that this has yielded much in terms of returns as yet,” agrees Wijnia. “Europe has of course made a rebound since September. But because we see the current move as a bear market rally and think there could be another correction moment, we see this positioning as correct. The risk is mainly in Europe.”
Black swans
As with other market participants, interest rate developments are a key factor in InsingerGilissen and Quintet’s outlook for 2023. In last week’s publication, the banks talk about a year that could emerge as a twosome. With a spring in which central banks stop raising interest rates, followed by a new global growth cycle. And alongside that: a divided recovery, with a laggard role for Europe and the UK.
In doing so, banks warn of “trigger events” such as the conflict in Ukraine and the inflation trend in China, where both zero-covid policies and tensions with Taiwan are high on the risk radar for 2023.
What about completely unpredictable black swans, which this year has once again shown can indeed tread water? Wijnia: “If you look back at this year, Covid-19 has still been the most decisive for the markets. That distressed supply chains and ultimately had a price-increasing effect. Then Russia’s invasion of Ukraine followed, and these events ‘coincidentally’ came together, accelerating inflation. If Covid-19 had not been there; how big would the inflation effect of the war have been? I think much lower.”
The inflation effect of commodities such as gas is starting to wane, reckons Wijnia, so the influence of structural effects such as wage growth and rents is starting to increase. “Then you pretty much get to that 5 per cent inflation growth for 2023 that is being talked about. That’s still high, but fuels expectations of a few more interest rate hikes in Europe. THAT is why that interest rate policy is so important. Economic activity is easing. Certainly in the first quarter the market will not improve much yet.”
Gold
Especially around trigger events and around a recession, InsingerGilissen believes its longstanding preference for quality-driven companies should come into its own.
Wijnia: “The interest rate hikes have made quality companies come off hard this year, but that indicates something about the attractiveness now. Those kinds of companies with a strong business model and strong market position are better able to move out of recessions.”
In the outlook, the bank still indirectly mentions a role for gold in the coming year, in case the central bank’s tightening measures prove too drastic due to a climate of slowing inflation growth. “Then this will be beneficial for gold prices. The same applies if the war in Ukraine were to escalate.”
Gold is not in InsingerGilissen’s main proposition - a sustainable proposition - because of the sustainability controversy surrounding gold mining. But the other models do include the precious metal. Currently, that position is neutral.
Wijnia: “Last year we were still overweight, but this year we went back to neutral. Due to rising interest rates, gold has not been attractive this year; bonds are relatively winning over gold.”
But that could be different next year, because of the correlation between real interest rate movements and gold price movements. “The expectation now is that interest rates have peaked along with inflation, and the interest rate environment will come down after that. That could possibly be positive for gold. Maybe gold will become attractive in the second half of next year.”
This article originally was published in Dutch on InvestmentOfficer.nl.