The Economy
Watching the Strait of Hormuz
- After three months of conflict in the Persian Gulf, its negative impact on growth and inflation will shape the course of the global economy over the next 12 months.
- The near-daily uncertainty regarding the terms of a possible agreement to reopen the Strait of Hormuz should not obscure the fact that the widespread damage to the economy is not expected to persist.
- In the United States, a “K-shaped economy” is unfolding: hope and optimism driven by the positive impact of AI, alongside a gradual loss of purchasing power among consumers.
- Europe, lacking fossil energy resources, is seeing its growth affected, although some countries have a strong component of renewable energy (Spain) or nuclear energy (France). A period of “stagflation” appears inevitable.
- Concerns over fiscal sustainability, due to high levels of public debt, are gradually but steadily emerging in many countries, particularly in the United States, complicating the Federal Reserve’s decisions in a context of leadership change, with the arrival of Kevin Warsh, whose past views raise questions about the future direction of monetary policy.
Markets
Return of the “bond vigilantes”?
- U.S. equity indices are at all-time highs, primarily driven by two factors:
- Strong corporate earnings releases (EPS) that exceed expectations.
- Confidence that AI will simultaneously deliver growth and lower inflation.
- The trajectory of indebtedness (the “debt supercycle”) is weighing on bond yields across all markets, as long-term lenders (10 years) demand higher compensation.
- At shorter maturities (two and three years), expectations of interest rate hikes by central banks, in response to rising inflation, are also driving yields higher. In financial jargon, this movement in the yield curve is referred to as “flattening.”
- Thus, financial markets are bifurcated: the bond market has not improved since the onset of the Gulf conflict, contradicting the optimism seen in many equity indices.
- Neither gold prices nor the dollar exchange rate have shown significant movements.
Investment Policy
Adapting to a Changing World
- In EDM-managed portfolios, a process of adjustments in asset allocation has begun, with the aim of further diversifying sources of return, at a time when the world is moving toward a polycentric economic and political structure in which U.S. hegemony may decline.
- U.S. equity investors have chosen to overlook the conflict in Iran, based on the country’s energy self-sufficiency. However, valuations (P/E) are still seen as a potential bubble risk. To this must be added the extremely high concentration of the S&P 500: 10 companies have accounted for 70% of the index’s gains since March.
- By contrast, European equities—favoured until January—have since become less attractive to tactical investors anticipating a negative impact of the Iranian conflict on growth. The high-quality European stocks we select appear clearly undervalued, particularly in the mid- and small-cap segments.
- Aside from this structural diversification process, no other changes have been made to portfolios, except for the opportunistic capture of valuation opportunities in specific companies.
LEGAL DISCLAIMER
1) This document is of an advertising and purely informational nature. It does not constitute and cannot be considered investment advice or a legal opinion, nor is it intended to replace the necessary professional advice in these areas. It does not constitute an offer to sell or a solicitation of an offer to buy.
2) All opinions and estimates provided have been prepared based on sources considered reliable. However, EDM Gestión, SAU, SGIIC cannot guarantee their accuracy or completeness and accepts no liability for any direct or indirect loss arising from the use of the information contained in this document.
3) EDM Gestión, SAU, SGIIC warns that past performance is not a reliable indicator of future returns.
4) EDM Gestión, SAU, SGIIC is a Spanish public limited company registered in the official register of management companies of collective investment institutions (CNMV) under number 49 and in the Madrid Mercantile Registry (volume 36,739, folio 52, sheet M-658,326), with tax ID A-58.217.175. Its activities include, among others, the representation, management and administration of investment funds and companies domiciled under Spanish law, as well as discretionary portfolio management.
