Emerging market opportunities

The euphoria in the financial markets has been driven by falling expectations of a severe recession. Although our models continue to indicate a US recession, this is likely to begin later in the year. This means there is no contradiction in the equity overweighting that is currently suggested by our model.

Should we blindly follow a machine? Or is human judgment needed to make weighed decisions? We believe that man and machine must act as a team to achieve the best results. That's why we developed the Wave, which is based on a big data approach and serves as a compass in our investment process.

The yield curve and our models point to a high probability of recession. But how severe will the U.S. recession be? To answer this question, we exploit historical data to examine the impact of the tightening cycle on GDP growth. The results show that investors should exercise caution in 2023.

The markets are still unimpressed by the approaching recession. This is the case even though aggressive interest rate rises, an inverse yield curve, the global “contraction” status of the Wave, and the similarities between the current market environment and 1989 as highlighted by our risk model all clearly suggest that 2023 is likely to see economic collateral damage.

Market participants are eagerly awaiting the Fed meeting in mid-December. How it chooses to tackle inflation will determine the severity of the recession, which our models – especially the Wave and the risk model – are now clearly signaling.

With Egypt’s Sharm el-Sheikh being the venue of this year’s United Nations Climate Change Conference (COP), it’s worth remembering that developing economies bear most of the negative effects of emissions mainly produced in industrialized nations. Therefore, the onus is on western companies to go “net zero carbon”, but how to measure their progress? One common yardstick for investors is the carbon footprint method – or the more encompassing “potential avoided emissions” method propagated by Vontobel’s impact investing team.