Inflation dropped off at a more moderate pace in January. Economists had expected a sharper decline in the US, while inflation in Switzerland actually crept back upwards. Despite this, we still think consumer price growth will slow considerably this year, prompting central banks to soften their tone.
In the US, bond yields continue to be pushed up by the robust jobs market and the slower-than-expected drop-off in inflation. However, 10-year yields remain below last autumn’s high of 4.25%. And we think this rebound will be short-lived.
Gold prices have corrected on the back of solid economic readings from the US and in line with the dollar’s downward trend. Investors are no longer so bullish on gold, and we think the next resistance level of USD 1,800/ounce should hold.
Europe – the stars are finally aligned for banks
Prospect of higher interest rates is worrying for financial markets, and especially equities, there will be some winners: European banks. After long years of negative interest rates, this new cycle of rate hikes will provide a major boost to banks, and especially their profits, with their net interest margins set to increase substantially in the coming years. This is starting to show in banks’ earnings – recent figures have been solid and received a warm welcome from investors. The consensus estimates were much too pessimistic, and now earnings forecasts are being revised upwards dramatically.
Bank stocks are some of the most sensitive to the macro cycle, meaning they’ve
been buoyed by the recently improved sentiment about the eurozone’s economic prospects. The more sanguine outlook is due to the decline in natural gas prices since last summer and the resilience of the region’s economic indicators, in a climate that nevertheless remains challenging.
We believe the sharp rise in interest rates will more than offset a likely increase in impaired loans resulting from the worsening economic conditions – although for now that increase seems limited. It’s also worth noting that several European governments have announced sizeable stimulus programmes to help consumers cope with rising prices. This will also be beneficial to banks.
There are two main reasons why we think the upward trend in bank stocks will continue. First, their valuations are extremely attractive, since these stocks are still trading at levels close to those seen during the 2008 and 2011 crises. And because banks are better positioned today, we should see a rise in their P/E ratios. And second, they harbour catch-up potential relative to the recent rise in bond yields.
Today it makes a lot of sense to invest in European banks. Not only will the sector be among those with the highest level of share buybacks in 2023, but it also stands to be boosted by monetary policy tightening and fiscal stimulus.
Energy transition – the subsidy race is on
The Inflation Reduction Act (IRA), which was signed into law last August, contains nearly USD 400 billion in tax breaks and subsidies to boost green technologies in the US.
At first glance, it could be described as the US government’s most significant piece of climate legislation, but its main aim is actually to make the US more attractive when it comes to innovation and the production of green technologies such as clean hydrogen, carbon capture, electric cars and car batteries.
The domestic content requirements applicable to the IRA subsidies smack of protectionism. To be eligible for a subsidy of USD 7,500 per vehicle, for instance, electric car manufacturers must, by 2024, produce or assemble around half of their parts or products in the States.
In response to these discriminatory measures, the European Commission unveiled its “Green Deal Industrial Plan” in early February. This plan aims to make Europe’s green industry more competitive by, among other things, loosening state aid rules. While it remains to be seen whether this response will be effective, the subsidy race between the US, the EU and EU Member States is most certainly on.
These measures show that governments are finally recognising that green investments are about more than just protecting the climate – ultimately, they will play a strategic role in strengthening energy sovereignty, economic growth and the labour market. In the fight against global warming, they’re an encouraging step forwards and will bring opportunities for companies looking to be part of the energy transition. This is all good news for Switzerland – perhaps it won’t have to move the February ski holidays to January in a few years’ time after all.
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.
