Titan pass
César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Last week was rich in news—and obituaries—in the US. Among the latter were the deaths of centenarian Henry Kissinger as well as of near-centenarians Charlie Munger, Warren Buffet’s right- hand man, and Sandra Day O’Connor, the first female supreme court judge. But there was little sign of bereavement on equity markets, which closed out their best month in three years with another rise last week. A strong drop in the core personal consumer expenditure index (the Fed’s favourite inflation gauge) and hints from one of the most hawkish Fed policy makers, Christopher Waller, that rates could be cut in the coming months if disinflation continues fuelled this performance. Signs emerged last week that inflation is decreasing rapidly in the euro area too. As in the US, falling inflation and comments from ECB officials led market participants to bring forward their forecasts for rate cuts next year. The drop in long-term bond yields may still have some way go, backing our overweight position on US and core euro area government bonds.
The fall in bond yields was further helped by a drop in oil prices, resulting in the fastest easing of financial conditions in four decades. Yet this easing of financial conditions is itself a reason for some caution because it leans against central banks’ attempts to tame inflation and make growth more sustainable. While slowing, core inflation is still above target and bringing it down much further may prove challenging. Those factoring in early rate cuts may also need to be careful what they wish for since they generally herald an economic slowdown, if not a recession. Our base case is that the US will experience a mild recession in the first half of 2024. The growth in retail sales slowed markedly in October while manufacturing activity contracted last month for the 13th consecutive month. In addition, the Fed’s ‘Beige Book’ survey pointed to a decline in economic activity overall in recent weeks. Meanwhile, US credit managers reported the highest level of bankruptcies since covid as rate rises continued to percolate through the economy. In Europe, where rate hikes have seeped faster into the economy, loan demand has been slowing, while some large European countries are exposed to a stuttering Chinese economy.
Last week was also a busy one in terms of corporate activity. We saw one of Europe’s largest real- estate empires crumble, but the news was more upbeat in the US, with a fast-fashion group moving towards what may be one of the largest US listings of the past decade. And the shares of one of the big car companies rallying hard after it announced a big share buyback. This chimes with our focus on companies with sufficient cash flow for dividends and buybacks, one of our big investment themes for next year.
