The economy
Surprises in US economic data
- US labour market data in mid-September prompted the Federal Reserve to cut official interest rates by 0.50%. However, more recent data points to greater strength and could affect the pace of further cuts.
- This strength is in contrast to weak growth in Europe, where Germany (35% of the eurozone) will close with negative growth for the second year in a row. This is compounded by France's need to correct its annual public deficit (-6% of GDP) with an adjustment of EUR 60 billion.
- This contrast highlights the US economy's “exceptionalism” and the weakness of European productivity, which is linked to the weight of the industrial sector and dependence on China.
- Meanwhile, growth in other eurozone countries, such as Spain, is much stronger. The IMF has just raised its growth forecast for Spain to 2.9%, driven by demographics (immigration) and tourism.
- China's 4.6% growth in 2024 is below the forecast. Alarmed, the government has responded by pumping liquidity into banks and the financial market. However, its structural problem remains: deflation caused by real estate over-investment.
- Inflation in Europe has predictably fallen, but the data and the possible outcome of the US election are leading to different interpretations on the inflation front.
Markets
Bonds lead the way
- The fall in US 10-year bond prices has triggered a sharp rebound in yields to 4.3%.
- We have also seen surprises in Europe. The French bond spread over the German bond is higher than that of the Spanish bond. This phenomenon is linked to a necessary fiscal adjustment of EUR 60 billion, the implementation of which depends on the decision of the National Assembly, where the government has a minority.
- These increases should have had an impact on stock markets, which instead did not suffer significantly. On Wall Street, technology stocks, which tend to be more sensitive to interest rates, have rallied.
- The publication of Q3 corporate earnings for 2024 was notable for its heterogeneity. Large European companies are being hit by the sluggishness of European consumption and the slowdown in China (automotive and luxury goods). The announced tax increases are not helping either.
- The dollar rose 4% in October, partly on expectations of more moderate rate cuts than expected and/or perhaps on ruling out a possible Trump victory, whose economic agenda is perceived to be more inflationary (“Trump trade”).
Investment policy
The market merry-go-round
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Market perceptions of economic growth and inflation are changing, steadily and rapidly. Not to mention concerns about wars and high levels of political instability and polarisation.
- It is also futile to predict the outcome of the US presidential election (“known unknown”), but in recent weeks some major traders have been betting on a victory for former President Trump, who is perceived to be more inflationary (*).
- There is no indication that this scenario is likely to change significantly in the foreseeable future. So what should long-term investors, who make up the majority of our clients, do?
- For several months now, our response has been to moderately rebalance portfolios by reducing exposure to equities and investing in short-term fixed income and/or money market assets (commercial paper).
- The aim of this rebalancing is twofold. Firstly, to comfortably meet cash withdrawals in those portfolios where this has been agreed. And secondly, to have low-volatility assets on hand should opportunities arise.
- The high valuations (P/E) of US tech stocks are casting doubts on the outlook for 2025 and beyond. The key will be their ability to continue to deliver high levels of profit growth, which is not sustainable in the long run. However, as they have taken on a highly oligopolistic profile, it is unlikely that much will change in the short term.
- It is also worth remembering that the moods of tactical investors and the bets of speculators are fickle, whereas the business performance of the excellent companies we have selected for our portfolios and investment funds is reasonably predictable.
(*) By the time this Flash is delivered, the results of the US presidential election will probably be known.
LEGAL CONSIDERATIONS
1) This information is for advertising and information purposes only. It is not and cannot be considered investment advice or a legal opinion, is not intended to replace necessary investment advice and does not constitute an offer to sell or a request to buy.
2) All opinions and estimates provided are based on sources believed to be reliable. However, EDM Gestión, S.A., SGIIC cannot guarantee that these sources are accurate or complete, and assumes no liability whatsoever for any direct or indirect loss that may result from the use of the information provided in this document.
3) This information includes data referring to past performance of the products mentioned above. EDM Gestión, S.A., SGIIC warns that past performance is not a reliable indicator of future performance.
4) EDM Gestión, S.A. SGIIC is a public company incorporated under Spanish law, registered in the Collective Investment Undertaking Management Companies Register of the Spanish National Securities Market Commission (CNMV) under number 49 and registered with the Commercial Registry of Madrid in volume 36,739, page 52, sheet M-658.326, with tax identification number A-58.217.175. It engages, among others, in the representation, management and administration of investment funds and investment firms domiciled in Spain and under Spanish law, and discretionary investment management.
