MARKET INSIGHT – July 2024

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

When politics gets involved…

At the start of the year, many economists and financial market observers were pointing out that almost half the world would be called to the polls in 2024, and that the political factor would therefore have to be taken into account when steering asset allocation and investment decisions. The presidential elections in the USA and the forthcoming intensification of the campaigns of Messrs.’ Biden and Trump remain of course the highlight of this year’s electoral landscape, but there is no doubt that the surprise dissolution of the French National Assembly decided by President Macron on June 9 represents a potential turning point for the markets, particularly European ones.

As the second-quarter earnings season drew to a close, the financial markets were preparing to enter the summer months with the daily flow of macroeconomic data as their main barometer. But this was without considering the sudden resurgence of political instability in France and the return of uncertainty in Europe, as one of the pillars of the European edifice seems on the verge of entrusting the keys to power to a party or parties whose European credentials are by no means obvious.

“Expect the unexpected”. Such could be the motto of the financial markets, whose evolution regularly surprises investors, due to a host of parameters likely to influence them. This time, we had to look to politics to understand the sharp contrast between European and American equities in recent weeks.

Up until the beginning of June, indices on the Old Continent had held up very honorably against the American ogre, whose major technology stocks continue to march ahead, but President Macron’s stunt has reshuffled the deck, at least temporarily. The S&P 500 is set to end June with a monthly performance of around 3%, while the Stoxx 600 will remain close to zero, weighed down by the immediate stock market backlash against French stocks, the CAC having given back most of its year-to-date gains in the first two weeks of the month.  

So, this time, we had to look to politics to understand the sharp contrast between European and American equities in recent weeks

Fortunately, it was not all bad news in June and, as mentioned in this newsletter a month ago, we paid close attention to US economic data, particularly the services PMI, whose April release at 49.4 had dampened the mood somewhat. This time, the May figure surprised the market with its strength (53.8) and, at least temporarily, dispelled the idea of a sharp economic slowdown in the USA.

Meanwhile, the various inflation indicators published in recent weeks have not shown any signs of a reacceleration in inflation, which, as we know, is a positive development for central bankers and the eventual start of a rate-cutting process in the United States.

In Europe, the ECB decided on its first rate cut of 25 basis points at the beginning of the month, as widely anticipated. However, let us not assume that this will automatically imply further rate reductions at each of the institution’s next meetings, especially as the timing of a first rate cut by the FED is by no means a foregone conclusion and may not occur until the end of the year.

For a change, the Swiss National Bank continued to surprise with its second rate cut. The state of the Swiss economy and the current level of policy rates are less of a problem for Swiss central bankers than for their European and American counterparts. So, this is no risky monetary gamble, but rather a legitimate proactivity on the part of the Swiss monetary authorities in a domestic environment that is relatively easier to navigate and, perhaps, a move designed to protect themselves from further instability in Europe.

There is not much to report from China, where the equity market remains erratic, even though a “floor” seems to have been found. The authorities offered no strong announcements (let alone actions!) in June, and the current problems facing the country (real estate crisis, youth unemployment, etc.) do not seem likely to be addressed quickly. Instead, it is China’s tense relationship with Taiwan (or its dealings with Russia) that are making the headlines. A potential return of Donald Trump is unlikely to ease these strains.

This brief review of the economic (and political) environment over the past few weeks does not incite us to alter our current allocations. On the contrary, the unexpected resurgence of uncertainty in Europe has enabled us to confirm once again the robustness of our portfolios and the instruments that make them up, including bonds and alternative investments with a European bias.

We remain confident in our approach, which combines defensive assets (cash, US Treasuries and gold) with niche fixed-income strategies (high yield bonds, emerging debt) and reasonable exposure to equities via global and thematic actively-managed strategies (technology, energy and healthcare) as well as ETFs.

Generally speaking, despite a good month of June, except for the French situation, we approach the second half of the year with guarded optimism. A number of signals suggest that US growth is beginning to show signs of slowing, albeit moderately at this stage. The recent volatility of certain economic indicators (notably the ISM services index) and persistently high inflation lead us to believe that the second part of the year could be less favorable for equities than the first.

In addition, the results of companies, particularly those whose order books have benefited from the artificial intelligence craze, will mechanically begin to slow down. Triple-digit sales growth remains the exception, not the rule.

A number of signals suggest that U.S. growth is beginning to show signs of slowing, albeit moderately at this stage

After many quarters in which high interest rates did not always seem to have a tangible impact on the US economy, the relationship between high rates and slower growth may be returning to normal in the months ahead.

The inflection point where the start of a series of rate cuts by the FED becomes necessary to support the market and give US businesses, especially small ones, some breathing room is probably drawing nearer. Without indulging in pessimism, we can expect valuations to be less supported by earnings growth in the months ahead.

If we add to this a European environment becoming more complex in the event of a deteriorating French political situation, and of course additional uncertainties stemming from the upcoming US election, we are left with a reduced visibility of the economic and financial climate over the coming months.

Although it does not make much sense, the performance of managed portfolios is assessed on a calendar basis. Having reached the halfway point in 2024, our goal of achieving competitive results with limited volatility has been achieved. It is worth noting that we have positive performance contributions from the fixed-income and alternative parts of our allocations, which is by no means a given this year.

We therefore reiterate our confidence in the current allocation and the instruments that make it up, while bearing in mind that the flexibility required to end the year on a high note will be decisive in a context where external factors, notably political, and the FED’s response to inflation figures will be key.