Between the slowdown in the deflationary process and the worries of the latest economic figures, there is a path that rewards prudence.
The “Golden Path” refers to the narrow path that humanity must take, in Frank Herbert’s science fiction novel Dune, to escape the overwhelming odds of extinction. Only the chosen prophet can see the tiny ramifications.
Investors and central banks are venturing in search of it. The cramped soft-landing route seems like a narrow, misty gorge. The walls that hug it (the loss of speed of the global disinflationary process on the left, the slowdown of certain sections of the American, European and Chinese economies on the right), seem to be tightening, as if to crush the surveyor, to bury the path.
In Europe, the good economic surprises of the first months of the year have fizzled out.
Until recently, the Eurozone stood out from the American and Chinese economic momentum. The indices of economic surprises were better oriented in our latitudes beaten by spring rains. The weather, which was milder at the start of the year, marked a welcome improvement in the German construction sector. The inventory cycle was improving, the IFO index (business confidence) and real wages were recovering.
Published a few hours before the “witches”, the European PMIs for June are now causing trouble. The industry is concerned about the drop in new orders, particularly for exports. Confidence is deteriorating in services, consumption is slowing. The June figures no longer coincide with the economic growth of the first two quarters (+0.3%). The path to economic recovery in the euro zone is not yet fading before us. But the road could be longer than expected. Especially since the French electoral uncertainty makes it slippery.
Concentration continues to increase around technology stocks. The valuation is problematic: with a capitalization of 30 trillion dollars, the Nasdaq 100 is now worth more than American GDP.
The bond markets are arming themselves with crampons. The France-Germany spread is at the 2017 level but the 5-year Credit Default Swaps remain contained (35bp compared to 50 at the time). In absolute terms, since the beginning of June, French 10-year rates have risen by only around ten basis points. On credit, primary issues are making a comeback in 2024, as in the United States, since the FED’s pivot at the end of last year.
The cost of CAC40 share capital is more sensitive to political developments: it has increased by 50 performance basis points since the beginning of June. Management is reducing exposure to French banks (which has become negative since the start of the year). In Europe the sector has lost 10 performance points since the start of the year. Strategists try their hand at stock market forecasts based on the results of the election: rebound of the Parisian index in the event of victory of the presidential alliance, contained volatility if the National Rally wins, significant drop (-10 to -20% ) if the left group takes over the majority of the lower house. It’s difficult to build an investment strategy with these scenarios if they prove to be as insightful as the electoral polls this year.
AI and investor confidence
The latest American figures are also more mixed. Retail sales are slowing. Defaults on automobile or consumer loans are increasing among young people, affected by rising financial conditions and less exposed to the rise in financial assets than their elders. Their wage gains remain well oriented but paradoxically, the unemployment rate and rising benefit registrations send a contradictory message to the job market.
Concentration continues to increase around technology stocks. The valuation is problematic: with a capitalization of 30 trillion dollars, the Nasdaq 100 is now worth more than American GDP. As a proportion of domestic wealth, index values are 3 times larger than they were during the 2000s bubble.
Despite the valuations, the AI seems for the moment to accommodate investors’ confidence in American growth (expected at +2.5% in the second half) as well as fears that an accumulation of more worrying figures could to release. If necessary, investors could continue to add duration to their portfolio, favoring investment grade credit which has accumulated 34 consecutive weeks of positive flows in the United States. The good performance of the latest results, the diversification of sources of income, the better coverage of the interest charge offers a profile less sensitive than high yield to the delicate scenario of a slowdown in growth in a context of higher key rates for longer than expected.
Compared to the average of the last 10 years, the investment grade deposit delivers an attractive yield on both sides of the Atlantic (5.4% in the United States, 3.9% in Europe compared to a historical average of 3.5% and 1.5% respectively) while High Yield benefited from a tightening of spreads making entry points less attractive. The choice of caution seems well rewarded. If they no longer envisage a highly inflationary V-shaped economic recovery, investors would therefore be wrong to deprive themselves of it.
