The economy: Inflation eases…
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October data confirms inflation is easing in both the US and the European Union: welcome news.
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The robust US economy maintains its high growth rate, while in Europe, the Germany recession curtails economic activity (see Table 1).
- Regardless, 2024 will see moderate growth in a ‘slowdown’ scenario. Debate persists, however, as some observers predict a mild recession in the second half of the year.
- Fortunately, geopolitical tensions (Middle East, Ukraine) have not caused oil prices to spike, as we have seen in previous conflicts (1973).
Markets: … triggering market euphoria
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Positive inflation data suggests an end to interest-rate hikes. Cuts, however, are another matter.
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This perspective prompted a phenomenal rally on the debt market (rising prices, falling yields), as well as for stock indices and EDM fund valuations (see Table 2).
- It is worth noting that index increases are highly concentrated around a few quality growth securities: in the US, these have a tech profile (‘Magnificent Seven’), while they are more diversified in Europe (‘Magic Eight’).
- Credit markets (IG and HY bonds) show no symptoms of quality degradation, though defaults and non-payments are beginning to appear in some segments.
- High interest rates have led to an unprecedented shift away from unremunerated bank deposits toward Treasury notes/bonds.
Investment policy: Diversification and caution
- After two or three months of unease about monetary policy, November’s euphoria was more a relief than a sign of an expansionary phase in the world economy.
- This will not prevent the companies in which EDM invests from registering reasonable earnings-per-share growth in 2024, in accordance with their structural growth profiles. This is the firmest foundation for the coming months.
- Less predictable is the moment when monetary policy will relax. When it does, valuations (P/E ratios) will contribute favourably to results.
- We maintain our approach of capitalising on attractive interest rates (4%-5%) and parking available money to make the most of opportunities that, in the current global political context, we believe are likely to materialise (‘known unknowns’).
- Finally, we consider it reasonable to extend the duration of bond portfolios.
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