Opportunities in a confused economy

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By Laurent Gorgemans, Global Head of Investment Products at Nordea Asset Management

A slowing economy naturally has downside effects on financial markets. However, it also offers investment opportunities: from more attractively valued fixed income sub segments to cheaper companies with robust cash flows.

Even if the global economy slows, central banks are tightening the reigns on monetary policy again as long as inflation remains a concern. As a result, inflation should start slowly ebbing away. We are starting to see the first signs of this in the US. Base effects, the impact of Fed and ECB policies and the expectation of lower oil prices should reinforce this in the coming months.

The European economy is likely to slow down significantly: from 3.1% in 2022 to -0.1% this year, according to consensus expectations. A shallow recession suggests a still decently robust labour market. In addition, energy prices should eventually stabilise at lower levels bringing some relief, though supply remains tight. Over a couple of quarters, we should see the economy recover, supported by lower inflation and an overall solid consumer balance sheet.

The US economy is decelerating: beyond the inflation shock for low-income consumers, the losses in the financial and real estate markets are further worrying middle-income households. This is leading the market to expect a Fed pivot, i.e. a reversal in the Fed’s monetary policy with interest rate cuts at a moderate pace. Such speculation is likely to intensify in the coming weeks, which supports both US fixed income and equities. The same can ultimately be expected for Europe.

What are the solutions for investors?

  • Not-to-expensive equities with robust cash flows are a good choice, as are covered bonds with increasingly longer maturities. They provide a transition to an eventually broader investment universe.
  • Multi-asset solutions that are less correlated to major asset classes are also a sensible option.
  • In fixed income, it could take a few more weeks for risk appetite to rise again. Investors will first turn to long-dated sovereign bonds as a Fed pivot is anticipated, then to credit, as the bottom of the economic slowdown is priced in with its resulting default rate.
    Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Information Document (KID) or the Key Investor Information Document (KIID) for UK investors, where applicable, relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/EP_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.

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