The economy: central banks get serious
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Inflation data on both sides of the Atlantic eases slightly (a turning point?) on declining oil prices (noticeable at pumps).
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This data fuels two opposing theories: the optimists claim the beginning of lower inflation rates, while the pessimists, focusing on still-high underlying rates, maintain that it will persist.
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If a recession (which has myriad definitions) ultimately materialises, it will be the most anticipated in history, and while its materialisation is possible, it is by no means guaranteed.
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Since the Jackson Hole Symposium, the central banks have tried to evade the prevailing sense that their monetary policies might trigger a recession.
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In the US, the most apparent symptom is the slowdown in the real estate sector, as the cost of mortgages begins to impact demand, the result of the Fed’s strict monetary policy.
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At the moment, demand remains healthy, despite the loss of purchasing power. In Europe, though the situation is deteriorating in Germany, the tourist countries in the south (Spain, France, Italy, Greece) are experiencing an incomparable summer.
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Still, consumer confidence in the current environment is fragile, causing many to question its longevity.
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To index volatility we must add sector rotation. The graph below illustrates the radical turnaround between H1’22 and this summer. In the last week of August, the situation changed again.
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Bonds also somersaulted in late August. All fixed-income segments continue to post losses since 1 January, especially among maturities greater than five years. Particularly striking is the evolution of public debt.
Investment policy: Macro vs. Micro
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Elevated volatility and uncertainty make macroeconomic forecasting difficult, once again lending credence to our investment style, which focuses on asset selection. Anticipating economic cycles and stock market performance is always an elusive and risky practice.
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Still, the Q2’22 earnings season delivered no negative surprises. By contrast, the results were positive among our strict selection of global companies that populate the portfolios whose management is entrusted to us.
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Fortunately, these results confirm the message of confidence we conveyed to our clients throughout a disastrous Q1’22. Despite August declines, performance over the summer has minimised the H1’22 downturn.
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The results of our long-term management are based on profit growth rather than the expansion of multiples (P/E ratios), which we do not expect in the coming years. The table below illustrates the results of investing in our funds in the last three years. They outperform inflation by far.
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The table also includes bonds. At current prices, they offer a yield that, though lower than inflation, is positive for the first time in several months: good news for the most conservative investors.
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Though no one knows what will happen with regard to markets or the economy in the immediate future, there is a general sense that the central banks will not lead economies into a deep recession. Rather, to preserve their credibility, they insist on perpetuating an anti-inflationary message: it’s a game of cat and mouse.
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