In Europe, Germany did recently slip into a technical recession after we witnessed two consecutive quarters of negative GDP growth. The decline in growth is being driven by the industrial sector. The consumer, however, does not feel this negativity as unemployment remains low.

This higher consumer spending has resulted in inflation being stickier than anticipated. Both the US Federal Reserve and the European Central Bank have been forced to keep their hawkish stance and hike rates further. And so, financial conditions have tightened further, and many industrial sectors are starting to feel the pain.

This is especially true in Europe, where a higher percentage of loans are at the floating rate, which means the pass-through is rather quick. New loans have slowed down markedly. Capital expenditure in developed markets is not contributing to growth, despite anticipated secular support from programs like the Inflation Recovery Act or the onshoring of the tech industry.

The uncertain macroeconomic outlook and inflation expectations result in higher volatility. This became evident again in March during the crisis around the US regional banks and Credit Suisse. We took the opportunity to add risk to our portfolios as financials had cheapened significantly. Since then the market has to a large extent normalized to pre-March levels, although certain pockets of value remain.

A buy-on-dips (and sell the rally) strategy from a conservative basis remains our preferred approach. Rates and recession fears are the key drivers in this cycle. And although 10-year US yields seem close to the cycle peak, volatility and uncertainty remain. Valuations are still around their long-term average, but are tighter than earlier in the year, while financial conditions have tightened further. For now we have taken some chips off the table.