Investing & Performance | 25 May 2023

Monthly update: The battle of the bulls and bears

There’s currently an important difference of opinion among investors about where markets might go next. And Coutts believe caution is key until it’s resolved.


An ongoing battle between the bulls and bears – the optimists and pessimists in markets – continues this month.

On one side we have those feeling confident after markets recovered from a mid-March slump and maintained further momentum throughout April.

But others are more focused on persistent signs of a US recession this year that would impact markets worldwide.

At Coutts, as long-term investors with a rigorous, data-driven approach, they believe it’s best to remain cautious until the ‘winner’ of this battle emerges.

Sven Balzer, Head of Investment Strategy at Coutts, says, “While the equity rally is creating renewed optimism among some investors, deteriorating macroeconomic data, coupled with falling house prices and tighter lending standards, remain reasons to be cautious and patient.”


An important new phase for markets

Sven adds that they’re seeing several shifting dynamics at the moment.

“US inflation is cooling, and we believe it’ll continue to drop into the summer,” he says. “As a result, the US Federal Reserve suggested it may pause raising interest rates for now. This potentially marks an important new phase for markets.

“Investors may now shift their focus from ‘when will interest rates peak?’ to ‘when and how fast might they fall?’ This could develop a new dynamic for markets, but we’ll have to wait and see. Again, we’re being patient, but are focused on the data and ready to pounce once opportunities arise.”


This cautious approach is reflected in Coutts’ investment positioning. They’re defensively positioned on stocks, for example. They’ve found that the more ‘defensive’ sectors they invest in, like healthcare, which tend to do well in a challenged economy, have performed positively since mid-March. 

Meanwhile, government bonds have provided useful diversification so far this year as bond prices benefit from expectations that interest rates will fall later this year and next.

In April, Coutts sold their exposure to the bond class financial credit and bought more investment grade bonds instead. With persistent recession signals and their expectation of tighter bank lending over the coming quarters, they prefer the less volatile and more diversified exposure of investment grade bonds at this point.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.


Coutts base their investment decisions on a range of measures that provide an indication of where the economy is heading. For instance, Taiwan is the world’s leading semiconductor manufacturer, making it an excellent bellwether for the global economy. And its industrial production has been falling for some time now – a signal that economic momentum may not be as strong as some think.

Similarly, manufacturing activity in the US remains subdued, and small businesses in America have been very cautious when talking about the future.

Another useful measure of economic conditions is the health of the US banking sector. The sector’s issues earlier in the year are not expected to cause a systemic shock, but a growing number of small businesses in the US are struggling to obtain loans after regional bank failures caused lending standards to tighten. Many were already finding it tough to get loans due to soaring interest rates.

This could be a notable headwind for small US businesses. Although such firms are not part of their investments, they can have a big impact on US economic activity and employment, and are worth watching closely.

Coutts Crown Dependencies’ clients can find out more about what’s happening in the investment markets and how it impacts their investments by speaking to their private banker.


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