Entering a Politically-Charged H2 2024
Key Points
US is not the only show in equity town –
While the S&P 500 index continues to be propelled higher by Nvidia and other mega-cap tech stocks, note that the Japanese Nikkei 225 index has risen 19% in yen so far this year, while the MSCI Emerging Market index has gained over 12% in US dollar terms.
Political risk weighs on French stocks –
Following the announcement of snap French legislative elections to be held in early July, the French CAC 40 index has slipped 8% from recent peak and is now only +1% for the year to date. Volatility is likely to persist until the result of the 7 July second round of voting for the French parliament is known.
Focus on Deep Value, ignored stock markets –
We have initiated a new investment theme on Deep Value for patient, long-term investors. We focus on cheap stock markets with catalysts such as the UK, South Korea and Turkey. While still volatile, China could also prove to be an attractive, cheap investment for investors who can absorb the attendant volatility.
Main recommendations
Remain positive on global stocks –
Key drivers remain improving global liquidity, to be helped by central banks lowering interest rates before year-end. Share buybacks and positive earnings growth are supplementary supports, while lower inflation and then lower long-term interest rates should also support valuation levels.
Preferred Investment Themes –
Clean water, copper miners, electricity infrastructure; circular economy, deep value markets.
The key risk for stocks at this point is that the Federal Reserve cuts the Fed Funds benchmark interest rate too late to prevent a sharp rise in the unemployment rate, and ultimately a 2025 economic recession.
Sector Allocation: no change this month
In June, value cyclical sectors have underperformed whereas growth sectors have done well
Recent economic figures show a slowdown in the US whereas elections in Europe and in other parts of the world bring new uncertainties. Despite cyclicals’ underperformance in June and the more complicated environment, we would not be too negative on these as a recovery is taking place in many parts of the world. Many cyclicals are cheap, particularly the European Financials.
Qua performance, US (Mega) Tech is still leading the charge, but the number of rising stocks is dwindling. It will be interesting to check this Summer, at the time corporates announce their H1 results, whether their forecasts still justify the current stretched valuations.
Regarding AI, remember that next to the tech sector, there are other vehicles to play this revolution, including companies in Health Care, Business Services, Industrials, and even some Financials and Utilities that are expected to profit from it. Be diversified.
On the other hand, we are cautious (-) on consumption stocks : they are often expensive in a context where consumers see their savings drying out and therefore tighten their belt.
We recently reduced the basic resources sector to neutral after a strong recovery earlier this year. We also reduced the Auto sector to negative considering sluggish sales in the West and a lack of competitiveness in the electric segment against China.
We still consider European banks as too cheap (our recommendation is +). They generate big cash flows, allowing them to continue returning sizeable amounts of cash to shareholders via dividends and share buybacks. The situation also looks healthy in the insurance sector (+).
Healthcare (+) is also among the best sectors in Europe, still driven by some great new medicines especially in the field of diabetes and obesity.
On the other hand, the materials sector performance has been subdued due to the relatively weak manufacturing activity globally, especially construction in China. The sector valuations are however attractive. Remember that the green transition will require lots of metals.
Listed European Real Estate is recovering but, although quite cheap, it still suffers from uncertainties about its refinancing, growth and dividends.