The economy
US consumer spending remains strong
- The United States economy continues to show signs of strength, with an unexpected uptick in activity indices in October. Growth remains above 2%, and the labour market remains strong despite a certain levelling off in new job creation.
- This strong economy contrasts once again with stagnation in the eurozone as a whole, with flat growth and its two main economies (Germany and France) facing complicated scenarios in both the private and public sectors.
- With the year just entering its final stretch, investors are discounting interest rate cuts on both sides of the Atlantic, leaving the Fed's benchmark rates probably at around 4.4% and the ECB's rate at 3%.
- This differential has led to a strong Euro-Dollar revaluation, currently close to parity.
- On the other hand, China's economic data continue to disappoint, and confidence refuses to budge upwards even though the government has approved various plans aimed at spurring growth. Its management of the real estate dilemma could remain a source of uncertainty in the coming year.
- Inflation continues to wane, despite a slight rebound in the latest US data. Ironically, reflation remains the big risk to the economy and to markets generally.
Markets
Bond and equity markets rising in sync (in the US)
- The election of Donald Trump, whose economic agenda presages public deficits, has led to a sharp rise in bond yields, now at around 4.3% for 10-year bonds.
- In Europe the political uncertainty in France has increased the spread for French bonds with respect to German bonds, even more than for Spanish bonds!
- The return of US bond yields to normal levels has coincided with an upsurge in equities in response to optimism in expectation that the new administration will be more business friendly and more inclined towards tax cuts. This twin upswing has meant that much of the US stock market is trading with little or no risk premium, i.e., the additional return that investors should demand from equities relative to bonds.
- On its part, the European stock market is widening the valuation gap with the American stock market, partly due to the absence of "good news" on the macroeconomic front, partly due to the potential effects of a more restrictive tariff policy by the new US administration.
Investment policy
Valuations require careful attention
- There seem to be quite different levels of optimism between the US equity market and all the other stock markets. Further, within the US stock market, investors' attention remains focused on a relatively narrow number of stocks.
- This scenario counsels caution about the valuations of some assets but in other cases gives rise to opportunities. EDM's portfolios have accordingly been reshuffled to seek the best asset quality to valuation ratio at all times.
- A priori, Trump's victory should favour a more inflationary environment, which could lead to volatility if markets perceive that the Fed's room to lower rates is narrowing. This will become clearer as we move further into 2025.
- We have continued to decrease the equity exposure of our portfolios. While leaning more towards European equities, which trade at attractive multiples.
- Our portfolios are thus well positioned to benefit from stock market rallies and at the same time to have "dry powder" to take advantage of opportunities in the event of corrections.
- It should therefore be noted that the bulk of the market operates with a very short-term outlook dominated by investor sentiment while ignoring long-term fundamentals. This creates both volatility in the markets as well as opportunities for patient investors who do not lose sight of the quality and soundness of the businesses in which they invest.
LEGAL NOTICE
1) The preceding information is provided for promotional and information purposes only. It is not, and is not to be taken as, investment or legal advice; is not intended to take the place of necessary investment advice; and is neither an offer to sell nor solicitation of an offer to buy.
2) All the views and forecasts expressed are based on what are believed to be reliable sources. Nevertheless, EDM Gestión, S.A. SGIIC cannot guarantee their accuracy or completeness and takes no liability for any direct or indirect losses ensuing from using the information provided here.
3) EDM Gestión, S.A. SGIIC calls attention to the fact that past performance is not a reliable indicator of future performance.
4) EDM Gestión, S.A. SGIIC is a Spanish public limited company with tax identification number A58217175, registered on the Spanish National Securities Market Commission's Special Register of Collective Investment Scheme Management Companies under number 49 and at the Companies Registry of Madrid in volume 36739, page 52, sheet M-658326. Its activities include discretionary portfolio management and representing, managing, and administering funds and investment companies incorporated and located in Spain.
