The economy
What is the economic scenario in the US?
- The summer brought a flood of US economic data, prompting diverse interpretations about the future course of the economy. Will there be a slowdown? A recession?
- The crux of the matter revolves around the evolution of the labour market, where the latest data suggests job creation is easing and unemployment rising, despite remaining at very low levels.
- This, coupled with the slow but steady decline of inflation, justifies the least ambiguous announcement yet from the Fed Chairman about the start of the long-awaited interest-rate cuts. Some, however, believe it is too late.
- In the eurozone, meanwhile, summer brought the welcome news of much-anticipated GDP growth, driven by the service sector, including tourism. The industrial sector, which is instrumental to Europe, has yet to reveal any significant growth, due largely to its tremendous concentration in Germany.
- The ECB should, therefore, follow the same path as the Fed. It was one of the first central banks to lower interest rates in light of easing inflation (Germany, Spain) and, more importantly, inflation expectations, foreshadowing further declines in the coming quarters.
Markets
August’s stock market yo-yo
- Global stock markets closed July at record highs, before suffering sharp declines in early August, due to the Japanese market’s brutal 12% correction in a single day, which triggered a cascade effect in the US and the EU.
- In subsequent weeks, markets regained territory and by the August close, the major indices surpassed July’s results.
- The summer’s flashpoint was the rise in interest rates in Japan, making yen-denominated debt more expensive and, thus, less attractive as a means of financing speculative investments in other countries and markets (carry trade).
- For short-term investors, this news was impetus enough to unwind leveraged positions at top speed and seek refuge in US sovereign debt.
- As a result, the yield on US 10Y treasury bonds dipped below 4% owing to a rise in price, attributable to compulsive buying by panicked investors.
- In the third week of August, US indices saw one of the most intense upswings in recent history. This volatility is common in the summer months, the result of lower liquidity in markets… when short-term investors (traders) are at the seaside!
- Given a widespread sense of uncertainty, the dollar is easing relative to the euro and the price of gold is soaring to new heights.
Investment policy
Facing volatility, diversification and discipline
- This month’s developments, once again, confirm the unpredictability of the market’s short-term behaviour.
- In the absence of new data to justify investor anxiety, EDM kept the structure of its managed portfolios virtually intact, enabling it to capitalise on the recovery in late August.
- In recent months, the assets of managed portfolios have become increasingly diversified in an effort to reduce volatility by bringing it in line with long-term strategic structures (asset allocation).
- This move was also advisable given demanding valuation levels (P/E ratios), even for the top-quality companies that comprise our equity portfolios.
- In the absence of further corrections, the data do not seem to require additional equity decisions apart from capitalising on the opportunity presented by small-cap companies, which are clearly undervalued.
- With regard to bonds, the beginning of interest-rate cuts would warrant a cautious increase in duration.
- Investors’ apparent indifference to credit risk persists. The current risk premium would be insufficient should default rates soar in an adverse economic scenario in the US.
- Finally, it goes without saying that we live in an environment of high volatility and geopolitical tension. The US presidential elections will be a critical turning point.
- In this interplay of risk and opportunity, we must refer to the data, meaning, management discipline and diversification.
LEGAL CONSIDERATIONS
1) This information, which constitutes EDM advertising, is intended for informational purposes only in accordance with the rules of conduct applicable to investment services in Spain, and is therefore sufficient and understandable for any potential recipient. The information may refer to or entail additional, separate documentation, which you may request from EDM. If this information contains offers of products, financial instruments, or services, recipients may avail themselves to any complementary or additional documentation that enables them to comply with the terms and conditions of the offer in question.
2) EDM Gestión, S.A. SGIIC is a limited liability company under Spanish law registered in the CNMV’s Special Registry of Collective Investment Scheme Management Companies (Registro Especial de Sociedades Gestoras de Instituciones de Inversión Colectiva) no. 49, and in the Commercial Registry of Madrid, under volume 36,739, sheet 52, page M-658.326, with tax identification no.: A-58.217.175. Its activity includes the representation, management, and administration of Funds and Investment Companies located in Spain and subject to Spanish law, in addition to discretionary portfolio management.
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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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