MARKET INSIGHT – April 2024

MARKET INSIGHT

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

Flight status: delayed!

We all know that unpleasant feeling when reading that a flight is delayed. Whether you are about to board a plane or awaiting the arrival of loved ones returning from a trip, delays are generally not good news in aviation. For the United States, on the other hand, the scenario of a “no landing” – in other words, the postponement in time of a future “landing” by the world’s leading economy after the rate hike cycle – is good news.

In recent months, we have regularly mentioned the hypothesis of a soft landing skillfully executed by the main central banks, led by the FED, but we must now accept the possibility that US growth will continue to be more vigorous than expected and, in the end, quite far from a mild recession. The resilience of Uncle Sam’s economy in the high interest rate environment of the last eighteen months continues to impress market participants, forcing them to reconsider certain key parameters of their strategy, notably the number of rate cuts to come.

A month ago, we described the irony of the current period, with on the one hand central bankers tightening policy to curb inflation, and on the other, data that sometimes appear to defy the traditional “cooling” mechanisms of the American economic engine, which seems able to adapt to a now restrictive monetary environment. The least we can say is that the figures for March did not contradict this trend, far from it.

Unsurprisingly, the U.S. Federal Reserve did not cut rates at its last meeting, but did raise its quarterly GDP growth forecast for 2024 (from 1.4% last December to 2.1% today), thus acknowledging that economic activity was continuing to advance at a steady pace!

The monetary authorities also indicated that they expected unemployment to remain low, at around 4%, and inflation to rebound, although it has been trending towards the announced 2% target for several quarters now. The latter seems logical in view of the country’s economic performance, where the trio of “jobs, wages and technology” is fueling a virtuous growth cycle.

In addition to the positive reception given by financial markets to Jerome Powell’s latest statements, we have seen a realignment of rate cut expectations for 2024

In addition to the positive reception given by financial markets to Jerome Powell’s latest statements, we have seen a realignment of rate cut expectations for 2024. These now seem much more in line with reality than they were a few months ago. At this stage, we can only applaud the soundness of the US central bank’s stance, whose resolutely pragmatic tone in no way rules out the pursuit of a data-dependent policy against a backdrop of close monitoring of inflation figures.

Europe, for its part, has not really broken any new ground in terms of monetary policy. Despite an economic situation quite different from that on the other side of the Atlantic, and a manufacturing recession facing several member states, Mrs Lagarde and her team failed to create any surprises by initiating the rate-cutting process ahead of their American counterparts. So let’s reconvene in June, when we should normally see the first coordinated interest-rate cut for both the “new world” and the “old continent”.

While we are on the subject, a word on the Swiss situation: the Swiss National Bank (SNB) did not bother with international timing, cutting its key rate by 25 basis points to 1.5%. The SNB reported that it had been successful in its battle against inflation over the past two years, bringing it back below 2% several months ago.

Finally, to conclude this quick international review, the Chinese economy continues to show some timid signs of improvement, although the government has not yet presented any major measures that would encourage Chinese consumers to boost the country’s economic momentum. The latter will have to show tangible signs of recovery if foreign investors are to return to the local financial markets.

 As we turn the page on the first quarter of the year, we feel it is important to bear in mind that the economic performance of developed countries, led by the United States, was fairly solid in Q1, and that the current environment is far removed from that of a recession. However, we are not oblivious to the great heterogeneity prevailing within the various segments of the economy, with manufacturing sectors remaining under heavy pressure, particularly in Europe, while services, driven in particular by the US consumer, are imparting dynamism.    

As for the financial markets and our allocations, we were able to capitalize on the strong performance of equities in the first quarter, with many indices currently trading at all-time highs. There is no need to revisit the technological revolution in artificial intelligence, which seems to be spreading rapidly, or the salutary effects of the expansionary US fiscal policy pursued by the Biden administration for several quarters now. We also note greater participation in the rally by various sectors, and a little less over-reliance on a few major US technology stocks than in recent months. Nonetheless, the current high market valuations leave little room for disappointment, and a special effort needs to be made in terms of stock selection and corporate balance sheet quality.

Our allocations favor equities, particularly US shares, although we do not intend to increase our exposure to them. The sector diversification we advocate seems to us to be a bulwark against a potential future air pocket should economic data deteriorate, particularly in terms of inflation, forcing central bankers to reconsider their willingness to loosen monetary policy somewhat.

On the bond front, the status quo remains unchanged. Recent confirmations of a rate cut in 2024 have been cautiously factored in by investors, who seem to be keeping in mind that the current environment still offers high interest rates and, above all, that its potential prolongation cannot be ruled out just yet.

Against this backdrop, the bond holdings in our portfolios also remain broadly diversified. Whether through passive exposure to short-dated US Treasuries, active high-yield products or a tactical position on the long end of the curve (20y), our approach to fixed-income assets emphasizes diversification. As with equities, we place particular importance on credit analysis when selecting individual issuers, as the risk of a mishap remains high after a prolonged period of high interest rates. 

We also note greater participation in the rally by various sectors, and a little less over-reliance on a few major US technology stocks

Still in terms of asset allocation, it is essential to highlight once again the attractiveness of the alternative pocket in our model portfolios, whose ability to decorrelate from equity markets remains very valuable. In addition to the long/short strategies we hold, we would be remiss not to mention the recent surge in gold prices, from which we have profited handsomely. It does not take much to see it as a sign of greater caution on the part of market participants in the face of geopolitical risks, electoral uncertainties and fears about the debt levels of some major countries. As with the attitude of central bankers and their assessments of the health of the economy, we remain alert on all three counts.  

After five straight months of buoyant equity markets, we believe it wise to remain exposed to them, without compromising on the quality of the companies whose shares and/or debt we buy. The sector diversification implemented in our allocations over the last few quarters will be more decisive than ever when the rally shows signs of running out of steam, whether as a result of more mixed economic figures, less constructive rhetoric from central bankers, or political or geopolitical uncertainties.

Regardless of the delays, the plane will eventually land, and we shall continue to scrutinize central bankers and the economic performance of companies, respectively pilot and co-pilot of our flight.