Market Commentary December 2023
"Climbing the Wall of Worry"
The rally on the financial markets continues without much of a breather. Part of the stock market in America seems to have been unraveling for several months. Artificial intelligence is on everyone's lips and is giving Mr. Market an additional boost. Ultimately, the pro arguments as to why it is not possible to invest in the Magnificent 7* without an equity exposure all make sense, but not without risks.
But first things first: Mr. Market seems to know more than the central banks would like to admit. He assumes that available capital will become much cheaper over the next twelve months. Because the futures market is expecting at least four interest rate cuts in Europe and the United States next year.
Since the end of October, prices for gilt-edged bonds, i.e. 10-year government bonds, have soared. In the USA they rose by 14% andon the old continent by 19%.
Lower interest rates not only lead to higher company valuations and share valuations due to the more favorable discounting of future cash flows, but the allocation of capital for new projects also becomes more available.
In addition to the general stock market, the Magnificient 7 in particular benefited from this. But beware, even though artificial intelligence is on everyone's lips and the companies just mentioned can benefit above average, we would like to remind you that an investment in a good company does not necessarily have to be an investment with above-average returns for the investor.
* Magnificent 7: Apple Inc., Alphabet Inc., Amazon Inc., Meta Inc., Microsoft Corp., Nvidia Corp., Tesla Inc.
Quelle: Bloomberg, CIIM AG
On the contrary! Investing in an ailing company that is led through a turnaround by a new capable management can yield above-average returns, e.g. Aryzta AG.
Back to the Magnificent 7, which completely dominate the US stock market. At the end of October this year, the index for the largest 493 companies in America (excluding the aforementioned 7) closed down 2%. But thanks to the Magnificent 7, the S&P 500 Index managed to gain an impressive 10%.
Quelle: Bloomberg, CIIM AG
While the weighting of the Glorious 7 was still well below 10% in 2015, they now dominate the index for the 500 largest companies with 30% (black line in the chart above). In contrast, according to Bloomberg, analysts expect only below-average earnings growth for the aforementioned protagonists.
Something will have to give way. Either the weighting will fall, or earnings growth will rise significantly above the estimated 17.6% in the foreseeable future in order to stay there. - By definition, the first scenario mentioned has a much higher probability than the second.
In combination with the higher valuation of American equities (see our last market commentary), investments in European equities have a much more interesting risk/return profile.
Slightly lower mortgage rates and marginally higher house prices in November, the second month in a row, as well as the lack of available properties helped UK real estate developer Persimmon Plc to clearly higher share prices (+24.3%).
Investors are beginning to understand that Novo Nordisk A/S's drug (Ozempic) is not a cure for kidney failure, but that there are only signs of success in delaying the progression of this kidney disease. Patients with kidney failure will still require dialysis. The shares of Fresenius Medical Care AG closed the month with a plus of 20 %.
The prospect of the settlement of a long-running case of insufficient cost transparency in the sale of life insurance products by the acquired Aegon NV made investors optimistic and lifted the shares of ASR Nederland NV by 20% over the last month.
Negative analyst comments and doubts about a sufficient pipeline of new drugs pushed the shares of French biotech company Ipsen SA, which specializes in rare diseases, down 7%.
The shares of the Danish biotech company H. Lundbeck A/S, which specializes in psychiatric and neurological drugs, suffered a similar fate. Doubts about not being able to bring enough new drugs onto the market in time caused the shares to fall by 11%.
The shares of D/S Norden A/S fell out of the OMX Copenhagen Benchmark Index, causing their shares to correct by 22%.
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Your CIIM Team