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Take some wins, hold your nerve and sail close to the wind

For professional investors only

Andrea Quapp, Investment Director for Multi Asset Class Solutions (MACS) Continental Europe, recommends that investors have more confidence in the strength and dynamism of the leading economies and utilise this for equity investments. However, geopolitical conflicts, delayed interest rate cuts and a shortage of skilled labour will always put the brakes on stock markets.

19 March 2024

On the financial markets - especially the stock markets - reality is being suppressed. Russia's war of aggression in Ukraine appears to be far from over - and is causing untold suffering and destruction. Israel's offensive against Hamas in the Gaza Strip has probably also taken most people by surprise in terms of its length, scope and intensity and is set to continue. These conflicts are absorbing state capital, which is flowing into armaments and reconstruction rather than financing infrastructure expansion, digitalisation and the promotion of renewable energies as planned. The underfunding in these important areas might only be felt on the financial markets after a delay.

However, stock markets have only known one direction for weeks - upwards. The German Dax share index is climbing to one record high after another. Since the low at the end of the third quarter of 2022, the Dax has gained almost 50 per cent in euro terms. The broad US S&P 500 Index is also trading above 5,100 points - just below its high. By contrast, the Swiss stock exchange is out of line, with the SPI trading below 15,000 - still around 10 per cent, or 1,500 points, away from its high in January 2022 (source: GAM, Bloomberg).

Germany: Stock market record during the recession

The state of the economies can only be inferred to a limited extent from the index levels. Germany in particular is being labelled the "sick man" of Europe, as it was in the 1980s. The country has been in a mild recession for months. High energy prices in particular are weighing on the important export industry. But the construction and property industries are also ailing due to high regulatory requirements. By contrast, the situation in America and India is completely different. In the US, the economy is booming, corporate profits are soaring and inflation rates are falling. The US economy has surprised on the upside for the most part in recent months. For example, strong annualised Gross Domestic Product growth of 3.3 percent was once again reported for the final quarter of last year compared to the previous quarter. There are signs of a good start to the first half of 2024. On the one hand, the significant job growth of 353,000 in January (source: GAM, Bloomberg) should be mentioned here. On the other hand, the dwindling pessimism in the previously sluggish industrial sector, which is reflected in the rise in the ISM Purchasing Managers' Indicator, stands out.

India’s tiger economy enjoys roaring growth

India is a dynamic giant. Last year, the subcontinent became the most populous country with 1.4 billion inhabitants, ahead of China. The pace of growth has accelerated. The country has led the G20 nations since 2015. Apart from 2020, the growth rate averaged 7 to 8 per cent and contributed a full 16 per cent to global growth last year. In contrast, China - the former global engine of growth - is consistently pursuing an increasingly dogmatic path and turning away from the West. This is leading to a slump in demand from industrialised nations in sectors such as automotive manufacturing and the capital goods industry.

Rate cut uncertainty is creating good times

The economic weakness in Germany, which is largely caused by politics - through an anti-business energy policy, unwillingness to reform and neglect of innovation - is compensated for by growth in other large economic blocs. In the expansion phase, labour becomes scarce in many places, enabling employees to push through wage demands that have long been deferred. Consumption benefits from this. Nevertheless, the high inflation that set in after the coronavirus pandemic is a thing of the past. Energy prices in particular and transport costs driven by supply bottlenecks have recently normalised.

The widespread decline in inflationary pressure has been fuelling expectations for months that key interest rates - particularly in the US - will soon be reduced. However, figures on consumer spending or newly created jobs as well as rather pessimistic statements from central bankers are repeatedly dampening hopes that interest rates will be cut soon. It is undisputed that the US Federal Reserve will start to cut interest rates this year, but when this will be the case is uncertain. However, this back and forth of expectations is a constructive environment for the financial markets.

The recession has lost its terror and bonds their appeal

The USA has avoided recession or at least postponed it into the future. Inflation is hardly a threat anymore, which is why the first interest rate cuts are expected in 2024. At this yield level, bond portfolios should move closer to a neutral duration. Only high-quality corporate bonds are still attractive, in our view. These companies do not need high economic growth to generate good yields, they also have strong balance sheets and cash flow and their debt-to-equity ratio is historically rather low.

Among the currencies, the US dollar could become less attractive as the US Federal Reserve begins to cut interest rates. Energy-importing economies will typically benefit from this.

The Magnificent Seven drive the stock markets forward

The USA is maintaining its dominant special role on the global capital markets and is proving this impressively in the stock market. The shares of the "Magnificent Seven", the largest technology stocks, have recently enjoyed fantastic price rises. Thanks to the boom in artificial intelligence, the chip company Nvidia has become the new darling on Wall Street. In view of the tech rally, investors are neglecting negative factors such as the high national debt, the fragile situation of regional banks in property financing and the turbulence of the election campaign.

Why defensive growth could be Swiss made

However, investors in the US have not only lost sight of potential crises, but also of the key figures on the stock market. The US market is comparatively highly valued and earnings growth is slowing. In this environment, shares from Europe and Switzerland in particular are theoretically attractive. According to figures from the data service provider IBES, earnings growth in Switzerland is above average at 11 per cent (source: Institutional Brokers’ Estimate System 2024). The defensive equity market, which has lagged behind its global peers since May last year, should surprise positively in the coming months, thanks to its special role with a consumer-orientated domestic market and many internationally positioned companies.

Europe, on the other hand, will have to make do with an expansion rate of 5 per cent in corporate profits. European countries will feel the effects of their dependence on external energy sources and a slowdown in global trade. The German stock market, which has been on a hot streak, is particularly susceptible to profit-taking and corrections.

Property funds have recovered

Investment funds that invest in property are popular diversification investments in Switzerland. However, with an average price advance of 10 per cent, the funds have priced in falling interest rates for fixed-rate mortgages and rising rents. Interest rates would have to fall more for further significant price advances. However, residential property funds have potential because they stand to benefit twice over: from the housing shortage, higher rental income and interest rate movements.

In the crypto sector, the authorisation of listed index funds (ETFs) on the spot price of Bitcoin by the US Securities and Exchange Commission has led to a price explosion. Bitcoin climbed above 60,000 dollars. In the absence of a real purpose for the cryptocurrency and the fact that every buyer is hoping for the "next fool" to buy the coin at a higher price, in our view the sector is only for speculators and soldiers of fortune.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein.Past performance is no indicator of current or future trends.  The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.

The German Dax share index is a blue-chip total return share index of 40 major German companies traded on the Frankfurt Stock Exchange. The US S&P 500 Index is stock index tracking the share prices of 500 leading publicly traded companies in the US. The Swiss SPI is a blue-chip stock market index comprises of the 20 largest and most liquid Swiss Performance Index (SPI) stocks.

The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Andrea Quapp

Lead Investment Director, Multi-Asset Class Solutions (MACS) Continental Europe
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