The outbreak of violence in Israel and the Palestinian territories this weekend is a reminder of just how fragile peace in the region is. For the moment, it seems unlikely that the conflict will spill over into other countries, which limits the risk of a strong market reaction.
Oil prices plummeted last week, with profit-taking heightened by investors’ extreme positioning. Nevertheless, this year’s key support levels remain intact, which suggests that oil will bounce back from current oversold levels.
The Fed’s monetary policy tightening seems to have had little impact on the US economy, which is holding up very well. This resilience was again reflected in the solid job creation figures recorded in September. And the upward pressure on wages seems to have eased – an encouraging sign that suggests that inflation will continue to ebb going forward.
Europe – are we reaching an inflection point ?
In recent months, European investors’ have been mainly focused on inflation and the ECB’s rate hikes. At the same time, the region’s economic data worsened further as lending conditions tightened considerably. The manufacturing sector continued to lose steam, and services – which until very recently had put on a show of resilience – joined in the downward trend, increasing the risk of a European recession in the process. At this point, we should make a distinction between Germany, whose GDP is contracting as high energy prices weigh on the manufacturing sector, the pillar of its economy, and countries like Spain, where GDP should grow by around 2% thanks to a rebound in tourism and investments in digitalisation and the energy transition. We believe the worst for Europe may now be behind us. Germany’s latest economic figures seem to have levelled off, and companies across the continent are coming to the end of their inventory cycle. What’s more, consumers should soon feel the positive effects of rising wages and disinflation. The 2024 outlook already looks more encouraging.
European stock markets have experienced fund outflows once again, not long after the US regional banking crisis and the collapse of Credit Suisse, and investor sentiment has remained bearish. But European markets are still attractive for investors with a long-term horizon. Stocks in most sectors are trading at a discount relative to their US peers, which undoubtedly explains why many firms now prefer to be listed on US exchanges. Another argument in favour of European (including UK) stocks is that they offer relatively high total returns after factoring in both the buyback yield (which has been rising in recent years) and the dividend yield (also at appealing levels). UK shares, in particular, are trading at a steep discount relative to both the S&P 500 and the Euro Stoxx 50. Inflation has been a big source of concern for investors, and it finally seems to be retreating in the UK, allowing the Bank of England to pause its rate hikes. An easing of bond yields would provide valuable support to the country’s equities, and we are ready to shore up the UK allocation in our portfolios.
Switzerland – the SNB is caught up in the economic slowdown
The Swiss economy has long avoided getting caught up in the economic slowdown in the eurozone, its main trading partner. But while services and consumer spending are still holding up well, the slowdown in the manufacturing sector is picking up pace, with the manufacturing PMI at its lowest since the 2008 financial crisis. This shows just how dependent Switzerland is on Germany, whose economy has been hit hard, mainly by rising energy prices. The strong Swiss franc is also weighing on growth. In that regard, the SNB failed to live up to market expectations when it kept interest rates unchanged at its September meeting. The message was very clear: the focus is now on the economy and not the strength of the franc. This is a welcome shift – and one that should give Swiss exporters a boost.
Thanks to their defensive nature, Swiss blue chips have been faring better since the summer. The recent financial market volatility, caused by stock market corrections, has been a boon for the Swiss market, which always does well in that type of environment. While investors are showing renewed interest in Switzerland’s defensive blue chips, we remain convinced that small and mid caps will do well. Many of these companies will be boosted by a weaker Swiss franc, and they continue to be more attractively valued than large caps.
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.
