By Bertel Roslev Rasmussen

July was another relatively calm month in the financial markets, where the markets were supported by positive signals from the central banks.

At the end of the month, both the Fed and the ECB held interest rate meetings, and as expected, both raised interest rates by 0.25%, but the statements from both central banks were interpreted in a dovish manner by the markets. This may therefore be the last rate hikes from them this time.

However, the decision to end the series of rate hikes will depend on the development of inflation figures, as they should show a downward trend, especially in so-called core inflation.

More and more investors are now leaning towards a so-called "soft landing" rather than the recession that many have been predicting. This summer's macroeconomic indicators have generally supported the narrative that inflationary pressures are declining and that economic activity remains positive - primarily driven by the service sector.

Low/falling inflation with positive growth is also known as the "Goldilocks scenario" and has historically been the best macroeconomic scenario for both equities and bonds. With their increasing belief in this scenario, investors have completely turned the tables from last fall, when the opposite scenario of high inflation and negative growth - the so-called stagflation scenario - was on everyone's lips.

However, economic visibility remains low. The optimism may be short-lived, as it is still difficult to determine if we have taken the full penalty of the interest rate hikes, as we haven't necessarily seen all - or even much - of the impact. One thing is certain, however. Consumers, businesses and governments will have to spend a significantly larger portion of their budget on interest payments than they did in 2021.

The US government is also facing a huge challenge, which may have contributed to Fitch's downgrade of the US credit rating from AAA to AA+.

The news of the US downgrade naturally made headlines, but we believe that the downgrade will only have a marginal impact on the financial markets.

Equity markets are still bubbling with optimism, and with a 2023 return for the world index of over 14% in DKK at the end of July, many observers have been surprised by the resilience of equities in an environment of sharply rising interest rates. Many, especially US equities, are now once again (as in 2021) highly valued both in absolute and relative terms compared to bonds. and therefore very sensitive to disappointments.

However, there are also segments of the market outside of the very largest US tech giants that still have attractive valuations. This is one of the reasons why, when advising equity portfolios, we have a preference for less risky and cheap stocks with a smaller market size. Our recommended managers generally avoid the tech giants, which are priced to perfection and are therefore at risk of significant headwinds in the coming years.