The economy: Debate among macroeconomists
- This summer a debate flared up among macroeconomists, with some predicting a recession in the US, while others believe the Federal Reserve will manage to reduce inflation without job loss (slowdown). Opinions are divided.
- The situation differs in the Eurozone where a slowdown is more palpable given the greater weight of the industrial sector and stronger trade relations with China, itself flirting with deflation.
- In both the US and Europe, those hardest hit by rising interest rates are the industrial and the real estate sectors. Services, meanwhile, propel GDP growth in countries where the sector plays an instrumental role (Spain).
- Emerging economies offer a highly varied panorama, though perhaps most striking is the very real possibility of deflation in China, a backlash against the hasty and prolonged debt process linked, primarily, to the real estate sector.
- Given this scenario, the central banks are finding it difficult to calibrate their monetary policies. They appear to be teetering on the razor’s edge, using language that justifies both a limited and perhaps final hike, and the maintenance of current interest rates.
Markets: The “Scottish” shower of July/August
- Investors dread the summertime because of the unpredictability and volatility linked to the holiday season, during which short-term traders go to the beach, reducing liquidity.
- We saw an example of this in July and August (2023). The macro data for July seemed to confirm that the central banks would sidestep a recession, and stock markets were enthusiastic. Then, in August, statements from certain central banks opened the door to further increases, prompting a correction that was later reversed “in extremis”.
- EDM Funds closed August with positive advances, as illustrated in the table below, which shows the 2023 results, as well as those since September 2022, a moment of peak pessimism.
- Among our selection of quality shares we have seen favourable profit growth in Q3 2023 relative to 2022, as well as risks posed by ongoing interest-rate hikes. Have we seen the last of them?
- Public (sovereign) debt saw maximum volatility consistent with statements from the main central bankers (Jackson Hole). This brought sovereign bond yields to attractive levels for conservative long-term investors (US Treasuries: 4.1%; Bund: 2.46%). Higher yields mean lower prices.
- Finally, the price of high-yield bonds, which rebounded in late August, suggests a degree of over-valuation if a US recession ultimately transpires.
Investment policy: Insisting on diversification
- It is common knowledge that EDM does not apply a tactical, short-term approach to the structuring of portfolios for discretionary management, but a strategic method based on preserving client assets and beating inflation.
- In the next letter from the CEO, scheduled for 30 September, Carlos Llamas will delve into EDM’s investment policy for the coming years, as the period of zero/negative interest rates draws to a close. This conclusion has certain implications.
- Suffice it to say, for the moment, our Asset Allocation Committee has already recommended that we further diversify all portfolio profiles gradually, introducing short-term bonds with more determination now that their returns justify the investment. In future, we expect to increase the number of longer-term equivalents.
- With regard to equities, we remain confident in the obvious: investing in top-quality companies, with reasonable growth prospects and little or no debt.
- These companies can weather both a recession, given low interest rates (P/E ratio), and a slowdown characterised by sluggish but positive growth (EPS). Results for the year (YTD) and since the September 2022 low point prove that it pays to invest in quality.
- Lastly, it is worth noting that the large amounts of money invested in so-called “alternative” investments (real estate, private equity, venture capital) are struggling to match past returns in the new interest-rate environment. In fact, capital is tightening in the latest funding rounds.
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- Market fluctuations due to unforeseen circumstances.
- Liquidity risk and other risks that alter the evolution of the investment.
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