29 Aug Economic Outlook August 2023
August 2023 Economic Outlook
The past few weeks have been a rather volatile Earnings Season. A good report gets you nothing, a mediocre one gets you trashed, unless a company totally outstrips expectations then you will get rewarded. Fortunately, this short-term rout has been rather shallow considering how far the Market has come this year.
From Goldman Sachs:
One bright spot is Short Term Fixed Income, especially Treasuries and Agency Bonds. This has become a no-brainer for undecided capital. Investors can scoop up a low risk 5+% return and have little to no commitment to duration. With the CPI below 3.5 we are finally able to get a real, inflation adjusted return. This will not last forever.
The Yield Curve has been flattening.
For Agency Bonds it has actually flattened and headed to almost Normal!
We don’t see yields going down this year or well into next year, so the Short Game is still in play but for those with longer needs with less volatility, purchasing longer dated bonds isn’t unwarranted.
What does this have to do with the Economy?
Our Outlook hasn’t changed much over the past few weeks. Surprisingly the trajectory is showing a soft landing with Recessions being segregated into sectors rather than the Economy as a whole. With downgrades from Fitch and Moody’s the Financial Sector has seen the biggest correction recently and this is on top of the defaults and closures earlier this year. Expect Financials to have a strong recovery in the coming months. China and other non-Latin America EM countries have been negatively affected by currency imbalances and trade wars. Once again, the United States is the best place to be invested.
From Aleco Savvas our Financial Analyst with a perspective on Private Markets:
Market data suggests alternatives are in a bottoming process across all key categories. Fundraising and deal volume declined heavily for 2022. Yet, that decline followed record high activity in 2021, leaving 2022 the second-best year in history. Q1 reporting for 2023 is almost all accounted for, and Q2 marks should begin to reflect in the coming month. We expect improved Q2 marks across most funds, considering that fund managers may choose to be more conservative with forecasts and marking of unrealized gains, adjusting for current economic uncertainty. The economic climate has favored certain strategies and proven more challenging for others. Distress has begun to distort pricing and valuations, which we expect to continue in pockets of commercial real estate, corporate debt, and venture capital. We cannot underestimate the transfer of systematic risk from public to private markets as private markets have stepped up and provided a much-needed “cushion” for the U.S. economy. A theme from our back-office is the increasing quality in deal flow moving through our due diligence pipeline, illustrative of the returns private markets can achieve by filling the void left behind by traditional counterparties. Manager selection, track record, and fund strategy are becoming increasingly important in the search for alpha. Our goal of avoiding those offerings that pull systematic risk along with it, thus increasing correlation with traditional assets, has become more relevant than ever. The current environment makes the 2023/2024 vintage attractive and congruent with historical outperformance in fund allocations during similar market conditions. QP, knowing what it is looking for and having abundant high-quality deal flow, intends to capitalize on the above economics.