US Growth Resilient, China Weakens – UBP

Amanda Cheesley Deputy Editor 20 September 2023

US Growth Resilient, China Weakens – UBP

Norman Villamin, group chief strategist at Swiss private bank Union Bancaire Privée, shares his investment outlook.

Global activity is expected to remain weak in the second half of 2023, with the crisis in China’s real estate dampening its outlook, Norman Villamin at Union Bancaire Privée said this week.

“China’s struggle with economic recovery remains a headwind for global growth,” Villamin said.

China’s 2023 growth outlook has been revised down from 5 per cent to 4.8 per cent. Moreover, he expects growth in the third quarter to remain subdued at 3.8 per cent year-over-year. He maintains a cautious stance for 2024, with growth expected to be up by 4.5 per cent. Nevertheless, Villamin expects that incremental stimulus measures will continue to be unveiled in the weeks ahead. See more about China’s outlook here

Villamin believes that there will be moderate global growth in the second quarter of 2023 and the first half of 2024: "The Asian recovery seems set to moderate over the next quarters, but it will remain a large contributor to global growth.” 

Europe could well remain in stagflation over the next quarters, he added. Germany is flirting with a mild recession while France and Spain should continue to perform better. The UK outlook remains cloudy as the Bank of England still needs to fight a resilient core inflation and sustained wage growth.

But US growth remains resilient, he said. Villamin believes that inflation will continue its decline but core services could well remain sticky in the US.

Portfolio allocation
In this environment, Villamin favours a neutral allocation to fixed income and equities. “The yields provided by fixed income are as attractive as the potential gains in equities over the upcoming months,” he continued. Consequently, he has reduced his allocation to hedge funds.

Villamin highlighted that US Government bond yields were volatile amid a resilient economy and the bigger-than-expected US Treasury funding plan. “US, European and UK 10-year yields have reached multiyear highs and potential upside risks remain due to further adjustments in key rates and large issuances from governments in developed countries,” he said. "Signs are growing that yields can continue to press higher moving into year-end. As a result, we raise our 10-year Treasury yield target to 4.5 to 5.0 per cent as the yield curve begins to normalise and markets seek to price a positive term premium for the first time in the past decade." 

Credit remains Villamin's preferred asset class within fixed income. His preference is for investment-grade corporate bonds, with a focus on credit quality which offer attractive returns for carry strategies. “The high-yield segment remains surprisingly resilient with spreads that tightened further over the summer,” he said. “While the issuers were able to term out their refinancing wall, we are heading to a more challenging economic outlook, paving the way for a less favourable situation for high-yield.” He recommends short-dated bonds with a focus on quality.

Villamin keeps a neutral view on equities, with a broad diversification across sectors and regions and only a slight tilt towards the US market. He also maintains structural positions in US mid-sized software companies and the energy transition thematic.

“Hedge fund performance has been disappointing in 2023 due to the lack of volatility. However, the asset class provides valuable diversification benefit in portfolios,” Villamin said.

He is prepared to explore the possibility of either expanding his carry strategy or potentially adding equities depending on market opportunities.

Villamin anticipates a progressive rebound in growth in the second half of 2024: “The prospects for developed economies have improved thanks to a still resilient US economy.” 

The growth gap between sectors and countries is large but has scope to narrow progressively in 2024, he added. Investment could drive a rebound in the second half of 2024 growth trend thanks to various supports from government in favour of climate change, infrastructure and new technologies. Global monetary policy is set to pivot to a neutral stance next quarter, while budgetary policy still looks stimulative, Villamin said.

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