It’s been a mild hurricane season in the US, which means losses have been low for insurance companies. Catastrophe bonds therefore continue to fare well despite rising interest rates and are still an attractive investment, offering yields of around 13%.
At their highest level since 1998, UK interest rates are starting to weigh heavily on consumers and have heightened the risk of recession. Retail sales were down 0.9% month on month in September, and consumer confidence shed 9 points, which is well below the consensus figure and similar to the decline recorded in the 2020 lockdowns.
Just under 20% of S&P 500 companies have now published their Q3 results, and it looks set to be a good earnings season. 75% of those companies have so far beaten the consensus, which is a decent proportion in historical terms. Earnings have exceeded estimates by 6% on average – a sign that economists are still too conservative in their forecasts.
China – small waves of stimulus
At first glance, China’s economic landscape seems to be much the same as in the second quarter. The recovery is still progressing at a modest pace, and it’s become clear that opening up the country’s borders wasn’t enough to reboot an economy emerging from three years of pandemic restrictions or to offset the effects of a gradual slowdown in developed countries. Although the difficulties in China’s property sector are almost certainly not systemic, they’re still casting a worrying shadow over the country’s economic growth, consumer confidence and investor sentiment, owing to the sector’s heavy weighting in the domestic economy. And the ongoing geopolitical tensions with the US are a constant reminder of the challenges yet to overcome.
But changes have indeed taken place, in the form of the stimulus measures introduced by Beijing. These measures aren’t as extensive as those adopted in 2008 but they’re nevertheless happening in waves. The policy easing picked up sharply over the summer, with moves aimed not only at bringing stability to the property sector but also at loosening conditions in the monetary, fiscal and regulatory spheres. We’re starting to see the combined effects of these measures: economic figures came in ahead of expectations in August and should continue to do so in September.
For now, investor sentiment in China is exceptionally low. While it’s true that the country’s economic recovery has disappointed this year, valuations are sitting at levels close to those recorded in November 2022 – shortly before the country’s reopening. We believe these valuations reflect an overly pessimistic outlook.
Exposure to China, which accounts for about one third of the Asia market, has created headwinds over the past few years in terms of both growth and returns on equity investments. But as its economy gradually recovers, China should once again become a performance driver in 2024 – one step ahead of other world regions. Valuations are still well below their historical averages. All these factors are prompting us to maintain our constructive stance on China, even though it’s still hard to predict exactly when investor sentiment will turn around.
Carried away by oil
Things can really change from one quarter to the next. Oil prices have gone from less than USD 75 in the early summer to more than USD 90 today. However, there hasn’t been any meaningful newsflow since then, just confirmation of what we already knew. Demand remains firm thanks to emerging market countries, led by China. Opec’s proactive policy has also kept the market tight, setting the stage for price rises. We think the current trend will continue, although we’re not expecting oil prices to reach the highs recorded in 2022. We’re therefore maintaining our current level of exposure, although we’re also ready to take profits.
As we head into the autumn, Europe’s natural gas supply appears to be much less tenuous than last year. Inventories have already reached full capacity, and this was achieved sooner than governments had planned. That can be chalked up to import diversification (USA and Gulf countries) and declining demand, largely among manufacturers. Unless weather conditions are unexpectedly severe, Europe shouldn’t have any problems with its energy supply this coming winter.
Gold prices remain directionless. Recently, they have, of course, been buoyed by heightened geopolitical risks, but this has been partly offset by rising bond yields. Fortunately, however, increasing yields have not weighed excessively on gold prices, as they have been known to in the past. In light of all this, we’re maintaining our current level of exposure to gold and will wait for yields to change course before taking a more constructive stance.
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.
