At the Opec meeting this weekend, Saudi Arabia announced it was cutting production by a further 1 million barrels per day, to 9 million. This rampdown, coupled with very low inventories and investors’ cautious stance, should push oil up from its current oversold levels.
First it was Japan, and now the South Korean and Taiwanese markets have started to attract investors this year. These markets have gained more than 16% since the start of the year, putting them among the best performers in the Asia region. The theme of artificial intelligence could provide a further boost to companies in these markets, which are exposed to the semiconductor sector.
Watch exports rose firmly in April, up by almost 7% year on year. While the US – the world’s largest watch market – posted negative growth for the first time in two years, China – the second largest market – has picked up the slack. Exports to China have more than doubled, which is great news for Swiss watchmakers.
Inflation is clearly easing
Households across most of Europe still have the feeling that inflation is soaring. That’s because food prices have risen sharply in recent months. It’s unclear why the prices of some products are still going up when the prices of basic foodstuffs have been falling. Why, for instance, have the prices of certain wheat-based products increased so much, when the price of wheat itself has halved in the last year?
As we explained recently, this is largely due to greedflation, with many intermediaries using the widespread inflation to rebuild their margins. But this practice appears to be coming to an end, and inflation has clearly been easing in recent months. Eurozone price indexes have recorded a particularly sharp decline. Annual consumer price growth is now just 6.1%, compared with almost 11% last October. The decline has not been evenly spread across EU countries – annual inflation has already dropped to around 3% in Spain but still stands at around 8% in Italy. This disparity doesn’t make things easier for the European Central Bank (ECB), which is why its president, Christine Lagarde, has taken a cautious stance. She has repeatedly said that the ECB is not done with its monetary tightening, with a 0.25-percentage-point rate hike expected at its meeting on 15 June.
The Swiss National Bank (SNB) will probably follow suit a week later, with what’s likely to be its last rate hike. At the end of May, Swiss annual inflation was just 2.2%, down from its peak of 3.5% in the summer of 2022. This brings us closer to the SNB’s long-term inflation target, especially given that core inflation (which excludes food and energy prices) has already fallen below the 2% mark. Things are therefore looking up for the financial markets: inflation is returning to normal, and rate rises haven’t derailed growth in developed countries. As a result, we remain bullish on both Swiss and international stock markets.
Let’s dare to remain upbeat on European banks
Europe’s Q1 earnings season is drawing to a close. Despite the many headwinds – including inflation – it has been an excellent season, and one of the best in the last 15 years when it comes to positive surprises.
In the wake of the collapse of several US regional banks and Credit Suisse, the European banking sector’s results were eagerly awaited. And they certainly didn’t disappoint. In fact, banks turned in record profits. The current round of rate hikes is clearly a boon for European banks. Yet investors remain cautious, given the numerous – and at least partly justified – concerns. These include stresses on US banks and fears about the commercial property sector, not to mention the economic slowdown caused by tighter lending conditions, and the possibility of deposits falling.
With a P/E ratio of around 6 forecast for 2024, bank valuations are close to those recorded during recent financial crises. But we don’t think they accurately reflect the improvement in banks’ balance sheets and profitability. What’s more, European banks are not as fragile as US regional banks, as they are more diversified. Lastly, the bond market, which is often one step ahead of the stock market, suggests that fears of default risk are fading, which should boost bank stocks. If history is anything to go by, it’s worth buying bank stocks on the dips, and when earnings are heading upwards and fears are riding high. European banks currently tick all those boxes.
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.
