The economy
A setback on the way to easing inflation
• Poor inflation data in the US suggests a slower-than-expected rate of CPI easing. At the same time, private savings levels are declining, indicating a slowdown: stagflation?
• The news in Europe remains mixed: modest growth rates, though the risk of a technical recession is subsiding on the good performance of the service sector. Spain will exceed 2% of GDP ∆ this year.
• China, meanwhile, surprised markets with a GDP ∆ of 5.2. Still, it faces an uncertain future with regard to making headway in the “digestion” of its housing stockpile.
• The central banks face a difficult quarter, given concerns about their monetary policies. The rising inflation rate in the US has prompted a readjustment in expectations regarding interest rate cuts in 2024; initially three were expected, we now expect one.
• In Europe, the monetary scenario remains unchanged and, if current trends persist, the market expects the ECB could cut rates on 6 June.
Markets
Earnings in April
• The cooling in rate-cut expectations by the Fed has tempered the widespread optimism of US investors since January...
• ...and the surge in uncertainty about inflation has triggered an upward adjustment in bond yields (with a drop in price), especially for US 10Y Treasury bonds.
• Stock markets remain heavily concentrated around a few companies trading at multiples commensurate with their high earnings growth but vulnerable to changes in sentiment.
• By contrast, the unjustified discount in small caps is particularly notable.
• The dollar remains relatively buoyant against the euro; that buoyancy could increase if the ECB cuts rates before the Fed.
Investment policy
Focus on corporate earnings reports
• The balance of Q1 corporate earnings reports confirms the strength of the set of top-quality companies that comprise our portfolios, which is welcome news for long-term investors.
• Although the fundamentals appear solid in the short and medium term, volatility stems from demanding valuations (P/E ratios) that can precipitate periods of stock market variability.
• In recent weeks we have seen companies that were trading at higher multiples adjust their valuations downward.
• Our Spanish equity fund (EDM Inversión), which predominantly features small- and mid-cap companies, and EDM Pointer, which focuses exclusively on small European companies, continue to trade at unjustifiably low prices that clearly reduce valuation risk.
• Among bonds, though expectations of rate cuts persist, the schedule is uncertain. This serves as encouragement to gradually expand the duration to horizons of 6-12 months.
• We remain committed to quality companies, while continuing to monitor medium-term risks.
• Given the foregoing, and having proceeded to diversify the portfolios, it seems unnecessary to introduce any major changes in the short term.
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. Market fluctuations due to unforeseen circumstances.
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