The economy
Is inflation on the rebound?
• The most recent data show healthy progress in the US economy, with very low unemployment rates... and a slight rebound in inflation!
• In Europe, more limited growth is driven by the service sector, while the more cyclical industrial sectors, which performed poorly in 2023, expect to see modest improvement in the months ahead.
• China, meanwhile, is having an adverse impact on economic developments in Europe. Distrust of official data does not negate the fact that real estate over-investment is the reason why China is the only major economy registering deflation (negative price growth).
• Misgivings about (a potential rise in?) inflation weigh on monetary policy expectations. At the moment, the data support the cautious approach of the central banks, which anticipate the first interest-rate hike in June.
• The expected impact of AI could contribute to a fundamental boost in productivity, such that economic growth will permit the repayment of debt accumulated from aid granted during the pandemic and investment efforts (Biden Plan and Next Generation).
• The virtual stalemate of the war in Ukraine and uncertainty about the US’s stance in the future are driving up military spending (2% of GDP, at least) in Europe.
Markets
The decorrelation between bonds and equities
• Stock markets are trending upward on very positive earnings growth (EPS), mainly from US tech companies.
• The so-called Magnificent Seven account for nearly 30% of the S&P 500, but they are not alone in posting good results.
• Europe’s GRANOLAS (basically quality growth) stocks also account for the bulk of growth, but belong to more diverse sectors.
• Concerns about slower and less intense interest-rate hikes weigh on bond prices, implying a rebound in yields.
• Apart from duration risk, credit risk does not seem to worry the market: high-yield spreads vis-à-vis debt appear to ignore default risk.
• If the ECB’s monetary policy proceeds to implement three cuts of 0.75% and the Fed does not, the dollar would appreciate against the euro.
Investment policy
Valuation risk among equities
• Earnings-per-share (EPS) data has been very positive, as have the guidances for 2024. This is particularly true among our selection of companies.
• To the extent that these companies remain strong, even in the context of a slowdown or recession, investment decisions will primarily depend on valuation (P/E ratio).
• This is to say that large companies trade at justifiable multiples, but are vulnerable to a shift in sentiment.
• By contrast, we have detected a completely undervalued market segment: small- and mid-cap companies.
• The EDM Inversión FI and EDM Pointer SIL funds are the perfect vehicles to gain exposure to these segments and capitalise on the opportunities they currently offer.
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