Market Commentary January 2024
Lower interest rates = higher profits?
Fueled by hopes of lower interest rates at the beginning of May, risk appetite was unabated in December, pushing the S&P 500 to all-time highs. There were plenty of reasons to see the glass half full: central banks holding on to the current interest rate level, as well as the slowdown in the US labor market. Everyone is talking about a soft landing for the US economy. But whether it can be realized? We shall see.
The narrative of a soft landing, i.e. consumer prices normalizing without triggering a recession, has unfortunately only rarely been realized in the past. As the chart below clearly shows, interest rate hikes have most of the time been followed by a recession. Sometimes only months after the interest rate peak was reached, as can be seen very clearly below in 1989, for example.
(Quelle: Bloomberg, CIIM AG)
Another indication of a weakening economy is reflected in the current inverted yield curve (see below). In other words, short-term investments in the bond market are yielding higher interest rates than long-term investments. Obviously, the majority of investors are investing in bonds with longer maturities. Such a positioning makes sense for investors, especially if they expect lower interest rates due to a recession. As long as there is no prospect of a stronger economy, it makes sense for them to park capital where it earns higher interest.
The economy lacks this capital. As it is invested in long-term bonds, it cannot be invested in new projects. Accordingly, fewer workers are needed, which in turn is reflected in consumption, which accounts for almost 70% of an industrialized economy, resulting in a weakening economy or recession.
(Quelle: Bloomberg, CIIM AG)
In our opinion, the risk of an economic slowdown in Europe and the United States therefore seems high. Analysts also expect a decline of 2.7% for European companies. In America, on the other hand, earnings growth of 1.4% is expected for listed companies. However, we believe that this assessment is susceptible to corrections.
After all, European equities are trading at a large discount to their peers in the United States:
Accordingly, European shares should be given preference over American shares and stock picking is more important than ever.
More of the same! - With the expectation of lower mortgage rates in the UK, demand for shares in UK real estate developers was unbroken. As a result, all our holdings in this sec-tor outperformed the broad market: Taylor Wimpey Plc (+13%), Persimmon Plc (+10%, Bellway Plc (+10%).
Slightly higher profit expectations from the management of the German Internet provider United Internet AG gave the share a tailwind. The shares closed the month up 12%.
Falling oil prices also had a negative impact on the shares of Spanish oil company Repsol SA. The shares fell by 4.2% over the last month.
Lower analyst estimates put pressure on the shares of the British utility Centrica Plc (-6%) as well as the shares of the British tobacco manufacturer British American Tobacco Plc (-9%).
Please do not hesitate to contact us if you have any queries regarding the fund.
Your CIIM Team