European espresso: thematic investing continues to dominate

So here we are in mid-April, and actually 2024 has already been a very interesting year. So the start of the year, and indeed for Q1, was marked by rotation, where the prior year’s winners – such as technology stocks – were punished, and the laggards in 2023 – stocks in the pharmaceuticals industry, for example – were rewarded.

However, in what is seldom the case, while there were big changes that happened with the changing of the year, [and as the quarter progressed], this phenomenon reversed. So what drove the market in 2023? Thematics such as investment in AI, reshoring, automation, and energy efficiency, continued to reassert themselves.

This was also helped by economic data, such as improving PMIs, GDP revisions upwards, and non-farm payrolls being resilient, thereby increasing the probability that the world in many regions is heading for a soft landing, or maybe even no landing.

In February, we saw stronger than anticipated US inflation prints, with the year-on-year CPI landing at 3.2 per cent. This was an acceleration since the January print of 3.1 per cent. This caused the US Federal Reserve (Fed) to keep interest rates on hold at 5.5 per cent, and actually, market participants have changed their expectations for when [interest] rates cuts will start, and how many will come through.

So at the start of the year, the belief was that rates cuts would start in March. That has now been pushed to June. And actually, with the more recent CPI/non-farm payroll data, expectations have now shifted again that rate cuts are probably going to start in September. And – at the start of this year – the number of rates cuts expected (in the US) was six. We are now actually at two.

So, if we actually compare what is happening in the US to Europe, we see a very different picture. Inflation in the eurozone has continued to cool, so the CPI here has gone to 2.6 per cent in February, from a figure of 2.8 per cent in January. So therefore, despite the fact that central banks are still talking about data dependency, it is likely that we might start to see central bank policy divergence, for the first time in a very long time.

What does that mean? It means we could see the ECB (European Central Bank) cute rates in June, ahead of the Fed. So ultimately, as a consequence of the better-than-expected economic data, investors have become more positive about the future, meaning that both the US and European benchmarks have performed well. So the S&P500 Index during Q1 to 31 March 2024 was up 10.6 per cent, and the MSCI Europe ex UK was up about 9.7 per cent.

The leadership in Europe, where we invest, came from the IT sector. Over-optimism on demand for AI technology, as well as the trough in the semi-conductor getting ever closer. Other sectors that notably performed well were financials and industrials. The former was powered by banks. Banks have performed well post these inflation prints and the expectation that rates will stay higher for longer. And actually, if economic conditions are more resilient, then we should not see non-performing loans, and therefore provisions, go up. Industrials continued to perform well, thanks to many of the thematics that you would have heard about in prior videos.

So – AI, reshoring of supply chains, automation, and likewise aerospace and defence, and defence investment and rearmament, as well as growth in the number of flights globally, both in developed markets and emerging markets. Our expectations continue to be that inflation will be stickier to the upside, and that as a consequence, interest rates will plateau. But we do think there will be some rates cuts this year.

What it does mean is that [we believe] it is a great environment for stock pickers such as ourselves to differentiate between good and bad companies because the cost of capital has come back.

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Begrippenlijst

Emerging markets: The economy of a developing country that is transitioning to become more integrated with the global economy. This can include making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.

GDP (gross domestic product): The value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more, and businesses may be expanding, and vice versa. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.

Index (indices): A statistical measure of group of basket of securities, or other financial instruments. For example, the S&P 500 Index indicates the performance of the largest 500 US companies’ stocks. Each index has its own calculation method, usually expressed as a change from a base value.

Inflatie: De mate waarin de prijzen van goederen en diensten in een economie stijgen. De consumentenprijsindex (CPI) en Britse index van detailhandelsprijzen (RPI) zijn twee gebruikelijke maatstaven.

Non-farm payrolls: The payrolls series that measures jobs in the US. The surveys is conducted for the Bureau of Labor Statistics. A representative sample of businesses in the US provides data for the payroll survey.

Non-performing loans (NPLs): Loans where the borrower is failing to make interest payments, or where they have failed to repay the amount borrowed within the timescale agreed.

PMIs: The Purchasing Managers’ Index (PMI) is a survey that acts as a leading insight into the prevailing direction of economic trends, based on the view of managers across 19 industries. The index is based on five indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.