A difficult environment for investors

Chart of the week from NN IP. Positioned for high inflation and slowing growth.

The release of macroeconomic data later in the week confirmed that the underlying momentum of global growth gradually slowed in the second quarter. Forward-looking components of global purchasing managers’ indices such as new orders continued to decline. The future manufacturing index, which looks 12 months ahead, also fell further, as did several national-level measures of business confidence. In this context, we have adopted a more cautious positioning in our multi-asset model portfolio.

As the economy begins to slow, high inflation is keeping policymakers’ hands tied.

The June US jobs report painted a picture of a strong labor market, although wage growth has slowed to just under 400,000 in June from almost 600,000 a month in early 2022. Such robust growth cannot be taken for granted going forward, however, as other labor market indicators suggest job growth could slow from here. According to the household survey used to calculate the unemployment rate, job growth has stalled over the past three months, a signal confirmed by a rise in initial jobless claims and a decline in the employment component of the ISM survey.

Although commodity prices have fallen recently, high-frequency data suggests that inflationary pressures remain elevated. As our Chart of the Week shows, this week saw fresh inflationary pressures in the United States, as estimated by PriceStats, which collects prices online to compile real-time inflation indexes. So while the economy begins to slow, high inflation is keeping policymakers’ hands tied.

PriceStats Inflation US Nowcast (Month-by-Month, %)

Source: PriceStats, NN Investment Partners

Against this background, it is not surprising that financial markets remain volatile. In response to the macroeconomic conditions discussed above, we closed our modest overweight to commodities and, within equities, our overweight to materials, whose performance is linked to industrial commodity prices. We maintain our maximum underweight in corporate bonds and modest underweight in equities and real estate.

Earnings Season: Prospects are more important than numbers.

This week, the US financial sector kicks off its second-quarter earnings season. This sector is expected to report an average of 20% lower earnings than in the year-ago quarter. There are several reasons for this, including higher provisions for bad debts and lower investment banking and wealth management fees that aren’t offset by net interest margins and higher trading revenues. This drop in earnings was well reported and shouldn’t come as a surprise to investors.

We’re not overly concerned about the second quarter earnings data for the broader market. The numbers are traditionally slightly ahead of expectations and annual earnings growth is expected to be in the 5-10% range. We will primarily focus on business prospects and margin developments as cost pressures mount at a time when earnings may be weaker as global growth slows.

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