Swiss private bank Lombard Odier has just released its latest Investment Strategy Report for Private Clients, sharing its outlook for regional markets, asset allocation strategies, and asset class views for the second half of 2023.

With Lombard Odier expecting the slowdown in growth and inflation to continue, the Swiss bank sees attractive risk-reward in high grade fixed income.

According to Bill Papadakis, senior macro strategist at Lombard Odier, consumer resilience is expected to falter in the US and there will be recession risks in late 2023 and early 2024, with interest rate cuts a story for 2024. 

In Europe, Papadakis believes that near-term growth prospects remain unimpressive. “Inflation is proving persistent enough to push the European Central Bank into an increasingly restrictive policy stance,” he said. “In the UK, domestically-driven inflationary pressures are also pushing the Bank of England to raise rates higher than previously expected, despite the improving outlook,” he added.

Meanwhile, China’s growth is showing signs of weakness, according to Homin Lee, senior macro strategist, after a strong first quarter driven by a rapid reopening from its Covid restrictions. But he believes that strong domestic demand should help it to achieve real GDP growth of 5.5 per cent in 2023, despite weakness in overseas demand, real estate, and industrial sectors. He thinks that China’s gradual transition to a 2 to 3 per cent growth pace in the long run should not be a big surprise given its demographic headwinds. “What matters more is qualitative vibrancy in its private sector,” Lee said.

“Japan’s economic fundamentals remain healthy, despite a challenging external environment,” he added. “A thriving service sector and resilient private sector investments lifted growth to 1.6 per cent in the first quarter." With inflation now sustainably above target, Lee thinks that the Bank of Japan is likely to end its policy of yield curve control this year.

Asset allocation
As growth and inflation slow, and interest rates remain on hold at high levels, Lombard Odier said it aims to build resilient investment portfolios with a neutral exposure to risk assets that can perform under a range of economic outcomes.

The Swiss bank leans toward fixed income, with a preference for US Treasuries and investment grade credit over high yield, and sees selective opportunities to earn attractive carry in emerging market debt.

In equities, the bank prefers quality stocks, defensive businesses, and non-US markets, which offer some valuation cushion as earnings' downgrades unfold. Edmund Ng, head of equity strategy, believes that Chinese equities could outperform in the second half of 2023. 

Meanwhile, Jianwen Sun, quantitative investment strategist thinks that oil prices have the potential to rise in the second half of this year, and a normalizing of demand in China will support copper prices. “Recession risks, peaking US real rates and a weakening US dollar should see gold shine, reaching $2,100/ounce by early 2024,” he added. The Swiss bank also sees scope for further US dollar weakness against the euro, Swiss franc and Japanese yen, and strength against the Chinese yuan.