Arxius de Research - Page 11 of 18

Financial markets have been in a good place lately. It is hard to find assets that have performed poorly. Equities have experienced the best start to the year in decades, with American indices setting record after record. Chinese markets were the last holdouts to join the celebration, and they have certainly made their entrance with astronomical rebounds. Fixed income continues to thrive following the setbacks of 2022: credit spreads are tightening, and when combined with the “duration effect” (due to declining global yields, which lead to price increases) and the previous carry (the coupons from portfolios), we are seeing a buildup of returns that we would gladly accept year after year. In fact, the only notable decline is in oil prices, which is a welcome development, as it helps reduce costs for both citizens and businesses while supporting the downward trend in inflation, which appears to be on the right track. The easing of inflation has prompted the Fed to cut rates by half a percentage point. They assure us that this decision is not a response to any underlying issues; rather, it is a luxury they can afford. The macroeconomic data supports their reasoning, at least for now. And they are not alone. Only a handful of central banks are not cutting their official interest rates (Japan stands out as one of the few exceptions, and simply because its rates were already at rock bottom). This creates a true paradise for financial assets: a strong macroeconomic backdrop coupled with falling rates. And to top it all off, we have the recent announcement of multiple stimulus measures in China, whose economy had been languishing somewhat worryingly. You wouldn’t think that Ukraine and Russia are still at war, that Iran is bombing Israel, that France and Germany aren’t exactly on easy street, or that in just four weeks we’ll have a new president in the US. But really, does it even matter? Israel has been bombing/under bombardment for almost a year, and nothing has changed. Just ask Ukraine, which has been embroiled in conflict with Russia for two and a half years. Trump would even be good for the markets, with his promises of tax cuts, which would initially boost growth and corporate profits. Granted, he wants to start (yet another) trade war with the rest of the world, but nobody’s perfect. Harris wants to raise taxes, but she will not be able to because she needs a majority in the two houses, which would be nothing shy of a miracle. It would also be miraculous if Germany avoids recession, but this is nothing new—it has been years since it has seen any growth. Meanwhile, France is grappling with a soaring deficit, and the government tasked with tackling it could collapse at any moment, thanks to a parliament so fragmented that no party has enough support. The far-right, euro-sceptic parties are winning elections across the board, and their failure to gain power is merely down to other parties implementing cordons sanitaires to keep them at bay. Meanwhile, Draghi is calling for urgent reforms, highlighting that Europe is falling behind on the global stage. Not to worry; the markets are rising. This irony is not intended to alarm anyone. We expect the economy to slow down, but just slightly: the labour market should stay strong, and the interest rate cuts along with lower oil prices (provided the situation in the Middle East doesn’t escalate into a direct war with Iran), will help offset any downturn. The stimulus measures in China are not a cure-all, but they are certainly good news. We expect the ECB to cut rates more than the Fed, as it has a greater need for it, and the markets are already pricing in extremely low rates for the umpteenth time. Both Trump and Harris would likely lead to larger deficits, which is quite concerning. However, this is more of a long-term issue (and as Keynes famously remarked, “in the long run we are all dead”). In the short term, neither of them will be able to accomplish much of what they promise. However, if Trump wins, we’ll need to pay close attention to the tariffs he ultimately implements, as this is a presidential prerogative that does not require approval from both chambers. The environment described is favourable for financial markets. What concerns us is that the risks are repeatedly ignored. Episodes of market declines last only a few hours, if they happen at all. Anyone without Nvidia in their portfolio is taking a significant risk—it’s nearly impossible to outperform the indices. Caution is rewarded with redemptions. Yet, we believe that being cautious is our duty to those who entrust us with their savings, especially when the risks are poorly compensated. We are not anticipating any impending catastrophe. On the contrary, the outlook is quite positive. That said, we feel that many assets offer insufficient potential returns for the risks they carry. We also need to be bold when the risks are well rewarded. The alternative—keeping money in deposits—will increasingly offer lower returns and won’t keep pace with inflation. And excellent opportunities are already out there. The market has essentially split in two. One half has priced in the belief that everything will always be wonderful, while the other half experiences sharp sell-offs when expectations—often exaggerated and short-term—are not met. This second group contains the winners of the coming years, and it is with these that we are gradually filling in our portfolios. Date of report: October 7th 2024

Research

As good as it gets

Growth is now the priority

Monetary easing is the main catalyst for fixed income

A recalibration

Job Report surprises the market

All eyes on China

What can we expect from the interest rate cuts?

The Fed delivers good news

How can you turn an idea into a viable business?

A sharp rebound

Financial education, key for today’s investor

A welcome tailwind for fixed income