The global trend to economic weakening has become more pronounced. Manufacturing has been particularly hard hit while demand for services has generally held up. The Fed, the ECB and other central banks have taken the initiative, announcing either less restrictive or even outright stimulative policies. This change of course may well be the main reason for this year’s extraordinarily strong equity market rally. But we advise caution as many stock markets are now highly priced and technically “overbought”. In the background Brexit uncertainty looks set to continue.
No end to Brexit uncertainty in sight
Two years of extensive negotiations have not yet delivered an orderly Brexit. On March 12 the UK parliament voted again by a large majority to reject the (slightly amended) UK withdrawal agreement. For March 13 a vote is scheduled for as to whether the UK should still adhere to the March 29 withdrawal date and leave the EU without an agreement. If this is also rejected, as we expect, a vote on March 14 is planned as to whether the UK should ask the EU to accept a postponement of the UK’s departure from the EU. We expect this proposal to command a Parliamentary majority and that the EU would allow a postponement of between one and six months. Thus, the miserable Brexit process looks set to continue but we believe a “hard Brexit” – i.e. one without an agreement – will be avoided and think there is a significant chance of a further referendum as to whether the UK really does want to leave the EU.
The auto sector is weakening
Worldwide, seasonally adjusted new auto sales have fallen around 12% from their highs in August 2018. The introduction of new emission standards may be a small part of the explanation. Also, general economic weakness is likely to have made potential buyers more cautious. Perhaps more importantly, we think that many consumers are putting off a buying decision until there is greater certainty as to the prospects for hybrid and electric cars and their relative attractiveness in relation to issues such as (i) cost, (ii) tax treatment, (iii) driving and environment-related restrictions, (iv) reliability, (v) mileage when fully charged, (vi) prestige, (vii) the developing infrastructure of charging points etc. etc.? Why not wait a few years, keeping the old combustion-engine clunker, and see how prospects for electric cars develop? If this analysis is correct, the traditional auto manufacturing sector has several quarters of weak revenues ahead.
A two-track economy in Europe
Alongside the traditional gulf between Europe’s North and South another gap has opened between manufacturing (not least the auto sector) and the still robust service sectors. Services are less impacted by trends in global trade flows and are presently getting a boost from improved levels of consumer confidence, especially in France and Germany. While many economic trends are now somewhat negative, wage growth is an important exception. Negotiated or “tariff” wage rates rose 2.2% in the Eurozone in the last three months of 2018, a rise not seen since 2012. We are keeping our Eurozone growth forecast for 2019 at 1% to 1.5%, thinking also that stronger labor markets should boost “core” inflation rates. We note the ECB has recently cut its 2019 Eurozone growth forecast from 1.7% to 1.1%
The Fed’s change of course has encouraged investors to favor “risk assets”
The Fed’s announcement, that future policy is likely to be less restrictive than previously expected (“should incoming data support this”), has led to a surge in the risk appetite of investors and stock markets. While the US business cycle does indeed look to be weakening, recession seems unlikely given the economy’s still-strong present position. Europe’s economy, on the other hand, is not far off recession.
The ECB has moved towards stimulus, further supporting markets
Also supportive for markets have been the stimulative announcements of the ECB. The cut of the ECB’s 2019 Eurozone growth forecast from 1.7% to 1.1% has led ECB recently to rule out any Eurozone rate hike this year. ECB Chairman Draghi also announced a new, low interest line of credit to Europe’s banks in order to boost bank lending. We are skeptical that this cheap funding source will have much impact as the problem seems to be lack of demand for credit rather that a restricted supply of it. Uncertainties, such as the potential for US trade hostilities or the Brexit process, are still likely to cause many companies to postpone investments even though the new ECB bank financing mechanism may reduce credit costs. Thus, recently announced ECB measures are likely to have their chief impact on the financial markets and on Europe’s banking sector. Here, the remarkable recent decline in European bond yields, and the fact that the recovery rally that began in January is still ongoing, speak for themselves.
Wall Street enjoyed a very strong January and February thanks to the Fed’s “birthday gift”
Especially in the US, equities have had a very strong January and February. The rally has occurred as the US economy has weakened and investors quickly understood that the Fed did not want weakness on Wall Street to spread and undermine “Main Street”. So, when the Fed commented that future policy was “data dependent,” investors saw the dependence as being on the S&P 500, the Russell 3000 and the Nasdaq equity indices. For some time, the Fed has been pursuing an additional policy objective – namely to ensure that US equities do not crash from high levels. As of early March, the US equity bull market is 10 years old. Its eleventh year has begun in robust mood thanks to the Fed’s anniversary gift.
For a time, the Fed may succeed in preventing small corrections and crises. But the price for doing so is that economic and financial imbalances continue to build, making a correction in risk asset prices further out in the future more likely. It is also becoming more probable that the next crash will see the Fed investing heavily to support equities, most likely via equity ETFs.
In the nearer term, the current bullishness on Wall Street could well be undermined by disappointing earnings and slowing demand. On the other hand, an announcement of “peace” between Washington and Peking on their trade disputes could push markets still higher. With the US trade deficit still enormous, peace with China could mean that US trade aggression has an increased focus on Europe, with higher US tariffs on cars imported from Europe a real possibility. Such a development would only add to the problems currently confronting European auto manufacturers which are listed above on page 1.
A rising risk appetite has hit the yen and the Swiss franc
Forex markets are not currently favoring “safe havens”, and most currencies have recently been able to appreciate slightly against the yen and the Swiss franc. But the euro is an exception here, coming under some pressure in the context of the ECB’s shift to a more expansionary stance. Here, the ECB has paused with the announcements of a new credit facility for Europe’s banks and that the first projected cyclical rise in Eurozone rates has been pushed further out into the future. A resumption of ECB balance sheet expansion seems unlikely unless Europe’s economic indicators deteriorate sharply once more, something we don’t currently expect.
In general, we advise caution as, following recent strong gains, many equity markets are now highly valued and are in some cases technically “overbought”.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
In the latest Aquila Focus, Nicolas Peter, Head of Banking & Investments, discusses the continuing rally in US tech stocks and the lack of an interest rate cut in the USA for the time being.
#aquila focus #interest #techrally #eam #aquilaag
In 2023, numerous geopolitical risks came to the fore, supplemented by interest rate hikes by central banks in the fight against inflation. The conflict in Ukraine will soon last two years. In addition, the situation in the Middle East has worsened, particularly between Israel and Hamas. An escalation of the conflict to neighboring Arab countries has been prevented so far. Economic weaknesses are also evident in two of Switzerland's key trading partners: China and Germany. These developments are leading to a lack of important impetus from foreign trade. Geopolitical issues will continue to play an important role in the coming year. However, the past has shown that the impact of such events on the global financial markets is often short-lived.
Fewer sustainability investments, but more investments in pharmaceutical companies and the healthcare sector. Artificial intelligence en masse, but shares instead of gold. These are some of the resolutions of independent asset managers in Switzerland for the first quarter of 2024, according to the latest AVI Index.
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