Equity investors ignore risks of recession

The US leading indicator has correctly forecast the last eight recessions. It now points to an imminent recession. The equity markets have so far been unshaken by the growing risks of recession. We remain defensively positioned.

Stefano Zoffoli

Recession risks are still being ignored on the stock markets. (Photo: iStock)

Companies' and households' demand for credit has also already declined due to the stricter conditions. However, the valuations of equity markets have continue to rise; the equity risk premium is currently at the lowest level since the financial crisis of 2008. At present, eurozone equities are even on the verge of an all-time high following a 30% rally. The energy shortage in Europe that has been overcome for the time being as well as the end of the pandemic restrictions in China have helped drive the share price increases.

The strong momentum of the equity markets has subsided somewhat in recent days and market breadth continues to be very low. We therefore remain defensively positioned and are leaving our portfolios almost unchanged. This means we still prefer US government bonds over equities. Within equities, we favour Switzerland and emerging countries, while we have a clear underweight in the USA. The problems among US regional banks remain and the discussions surrounding the debt ceiling in the USA are expected to pick up pace in the coming weeks. In comparable phases of 2011 and 2014, equities lost considerable ground, while US bonds made gains. We are thus prepared for this kind of stress scenario.

We see opportunities with the yen, which would appreciate significantly in the event of an adjustment to yield curve control by the Bank of Japan. 


  • Inflation expectations at the long end are still too low (2.2% for seven years), but the focus is on the current decline in headline inflation.
  • In the coming months, the inflation rates will continue to move downwards – in the USA to below 3%, following a record level of 9.5% in June 2022. The impending recession is crowding out inflation expectations.
  • For this reason, we are selling inflation-protected bonds and instead buying USD nominal yields.
  • Eurozone equities have benefited tremendously from improving economic activity and the averted energy crisis. Share price rises are at +30% since October 2022, thereby reaching the all-time high of early 2022.
  • European monetary policy is now more restrictive compared to US monetary policy; earnings momentum among companies is also declining somewhat.
  • We are therefore taking some of the profits again and shifting in equities from the eurozone towards the UK, where valuations continue to be extremely favourable with a price/earnings ratio of 11 (global P/E ratio: 17). In the UK, the momentum and peak of inflation were likely reached in March at 10.1%.
  • However, the strong weighting of the commodities and banking sectors in the UK represents a risk.

Tactical Asset Allocation May 2023

Relative weighing vs. Strategic Asset Allocation (SAA) in % in April and May 2023 (Source: Zürcher Kantonalbank, Asset Management)