The French presidential election represents an asymmetric risk for the euro, which has been one of the weakest currencies over the past year. It looks like the downside will be greater if the far right wins. We have therefore once again reduced our portfolios’ exposure to the single currency.
Oil prices are still highly volatile, caught between governments’ attempts to drive down energy costs and a very tight market. Oil prices again tested USD 100 support levels before rebounding sharply.
Emmanuel Macron is still the frontrunner in the French presidential election. A win by Marine Le Pen has almost certainly not been priced in by the markets and could cause a correction on European stock markets, especially among French stocks with major domestic exposure, such as banks and very small caps.
USA – shocks well absorbed
It has been a choppy start to the year for US equities. A host of uncertainties have emerged over the past three months, clouding the outlook for the country’s economy and weighing on GDP growth forecasts as well as on investor sentiment. Worries about inflation have been compounded by concerns related to the war in Ukraine. But despite these new headwinds, US stock markets lost relatively little ground in the first quarter. Could this be a sign that investors have become complacent?
Investors believe, and rightly so, that the economic impact on the US will be more limited than elsewhere, notably in Europe. Yet the conflict will certainly drive up already extremely high inflation rates in the US, or at least push back the timing for a return to normal price rises. The US Federal Reserve will become even more determined in its efforts to maintain price stability, which is a key element of its mandate. But despite the hefty round of monetary tightening on the cards for 2022, with a rate hike expected pretty much every month, inflation will probably ease only slowly. The Fed’s 2% target won’t be reached until at least Q1 2024, which could undermine consumer confidence and put the brakes on household spending – a crucial driver of the US economy.
But as these new threats appear, others have been evaporating. The COVID-19 pandemic is already a distant memory in the US, and Americans, now free of restrictions, are returning to life as they knew it. This should further enable robust economic growth and mitigate the effects of runaway inflation and tighter monetary policy.
It will be hard for US stock market indexes to keep outperforming their peers, mainly because valuations are still at worryingly high levels – although it is true that multiples have been falling for several quarters, with the P/E ratio on S&P 500 stocks dropping from close to 22 at the start of the year to 19. We therefore remain slightly underweight in this asset class. If valuations fall back and US inflation starts to recede, we could adopt a more constructive outlook on US equities.
China – COVID-19 symptoms are hard to shake
Investors in the developed world quickly shifted their attention from the pandemic to the war in Ukraine, rising inflation and higher interest rates. But that’s far from the case in China, where the pandemic’s effects are still being felt heavily, some two years after COVID-19 first appeared.
China is currently experiencing its biggest-ever wave of COVID-19 infections. While the number of new cases daily is not very high in absolute terms, the population’s low immunity (owing to the poor effectiveness of the country’s vaccines) and the government’s stubborn zero-COVID strategy will inevitably cause economic output to slow in the near term. Beijing’s
approach to eradicating the virus seems to be inadequate in light of the highly contagious nature of the Omicron variant. Whole cities, accounting for over a third of the country’s GDP, are in partial lockdown – and COVID is once again the biggest threat that the country faces.
The Chinese government will have to adopt more concrete and more aggressive measures if it wants to reach its rather ambitious goal of 5.5% GDP growth for 2022. The path Beijing has taken so far – adopting an accommodative tone and then responding to crises as they occur – won’t be enough to repair the damage caused to the economy and certainly won’t reassure investors. Investor confidence is still shaky after China’s self-inflicted regulatory woes in 2021. This was reflected in the sharp volatility in the prices of US-traded Chinese stocks in March, when the US securities regulator threatened to delist them.
Although Beijing’s subsequent promises of supportive measures have temporarily calmed investors, visibility going forward remains limited. But, given the new threats on the horizon, we are still maintaining our cautious stance as we wait for more clarity on the US regulator’s position and a more convincing, “whatever it takes” commitment from the Chinese government
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
