The economy: Inflation and monetary policy dominate headlines
- Having ruled out an immediate recessive scenario, economists and investors are divided in their opinion about economic growth and inflation for 2023 and 2024.
- The US delivered surprisingly strong growth and employment data, favouring expectations of ongoing restrictive monetary policy (5.55% at 30 June 2023?), this according to the latest speech by the chairman of the US Federal Reserve.
- In Europe, inflation is on the decline due to a drop in energy prices, but not in other items, namely food, whose resistance foreshadows the trajectory of monetary policy (4% at 30 June 2023?).
- This tightening is indicative of a slowdown (“soft landing”) in 2023, or perhaps a technical recession in the US in 2024.
- The impact of the re-opening of the Chinese economy will be insufficient to alter the global panorama in a significant way, though it may affect energy prices in the second half of 2023.
Markets: January’s optimism cools
- Healthy data in February (spending, employment) in the US cooled the optimism at the start of the year since, in the best-case scenario, it postpones any decline in interest rates until Q4 2023/H1 2024.
- The second fortnight in February was, therefore, negative for both equity and bond markets.
- Volatility is high, though the year’s rebound in share prices persists thanks to record earnings per share (EPS), especially among companies based in Europe, as a result of three drivers:
- Growth in spending (post-Covid)
- Growth in prices (inflation)
- Strength of the US dollar
- At the February close, the EDM fund results were are as follows:
- Many investors have capitalised on rising profitability in the money market and bond market, drawn to the attractive yields offered by current prices (below redemption).
Investment policy: Attentive to valuations
- As stock markets rebound from October 2022 lows, the multiples (P/E ratios) of top companies become more demanding and, in some cases, excessive.
- These multiples are justified by their long-term profit growth (EPS), but are potentially vulnerable to the changing sentiment of tactical investors who dominate the world today. This opinion is especially pertinent in an environment of rising interest rates.
- The war in Ukraine continues with no foreseeable horizon, increasing geopolitical risk.
- Thus, investors should be sure to: (1) invest in great companies, but (2) not overpay for them. At the moment, there are no bargains on the market, except for some Spanish companies and small European concerns.
- Once interest rates hit their peak (June/September), they can only go down! This will favour companies preferred by EDM: structural growth (defensives) or high growth (technology).
- This will also likely be the time to extend durations in government debt.
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