Dear Investor,

In my previous letter, I said the recession we have been waiting for since January, much like Godot, was far from certain. Three months on, the recession is still not on the horizon, although the accumulation of signs that global growth is weakening is undeniable.

In the face of surging interest rates, the resilience of activity on both sides of the Atlantic is due to unprecedented, pandemic-driven fiscal largesse aimed at offsetting the loss of income for both households and businesses. Three years after the outbreak of Covid, the failure to return to budgetary rigour, while supporting economies, has continued to inflate public deficits.

Restrictive monetary policies have proved to have little effect. This is particularly apparent in the labour market, which has sustained a consumption level buoyed by rising wages and modest unemployment. In contrast, these restrictive policies have impaired governments' ability to continue financing growing deficits at moderate interest rates. Household savings continue to be attracted to the valuation prospects offered by equities, while the large traditional lenders, China and Japan, are gradually turning away from US and European bonds.

The sharp rise in long-term interest rates over the quarter (from 3.80% to 4.80% on US 10-year Treasuries and from 2.40% to 2.90% on German bunds) has left many investors hoping for a stabilisation. Or even a decline. A little belatedly, nostra culpa, we are doubtful. Public financing requirements are difficult to compress and the savings available to meet them will remain insufficient so long as global economic activity offers appealing investment alternatives.

What is the outlook for investments in this context? We are convinced that the Central Banks will be keen not to play the sorcerer's apprentice by further compromising the financing of public spending. Contrary to market consensus, we think it is unlikely that short-term rates will continue to rise in the US and Europe. Under these conditions, the fight against inflation will become less of a priority, which suggests that real interest rates will fall significantly over short maturities (below five years). Long-term interest rates will remain uncertain and even problematic for lax governments. Credit markets will be supported by the prospect of moderate real short-term rates. As for equities, while they will also be supported by the receding risk of recession, valuations will be affected by high nominal rates and the slowdown caused by the inevitable contraction in public deficits. More than ever, companies with low debt and good visibility should be favoured.

And much like Godot, the recession could not be forthcoming...

Yours truly,