Yves Bonzon (Julius Baer) | It is my long-held view that political noise is an exogenous factor that is hard to time. As long as we can remain sufficiently confident that the external shock is not triggering a systemic crisis or a recession, we must stay focused on the fundamentals and resist the temptations of exploiting the irrationality of a whipsawing market. And I still see a wealth of factors favouring a long-term uptrend of equities in a low-growth and low-inflation world.
The steep learning curve of the Fed
The Federal Reserve Board will buy USD60 billion of Treasury bills and bonds per month for at least the next six months. With this lengthening of its balance sheet, the Fed addresses the tightness on the US money market in a pragmatic and efficient manner. We all know that the post-Lehman regulation is requiring banks to hold an unprecedented level of liquidity, in particular high-powered money. And we have seen how bank liquidity rose in line with their credit book. In the final quarter of 2018, the Fed had caused havoc on the financial market when it kept raising interest rates and shortening the balance sheet at a time when the rest of the world had been luring for lower rates. Compared to the developments back then, the Federal Reserve has acted very fast and efficient to address the problem this time. It is reassuring to know that the world’s most important central bank has returned to its proven, pragmatic conduct of monetary policy.
Little fiscal impulses from the EU summit
Hope always dies last – and so we still wait for a broad fiscal stimulus in the Euro area. We all know that the combination of an ultra-easy monetary policy to compensate for the lack of structural reforms and the tightness of fiscal policy is not sustainable in the longer term. But alas, what the EU finance ministers have prepared at their summit is not more than a baby step in the right direction. Moreover, the endless Brexit debate will most likely dominate the agenda of the forthcoming EU Summit. Expectations of a rapid normalisation of EUR government bond yields and money market rates must be kept at a low level.
In a world of low growth and depressed yields, growth stocks will continue to outperform value stocks. The rebound of the latter in early September is merely a correction in their downtrend.
No stress signals from credit market
The credit market sees no systemic stress. Credit spreads are close to their long-term averages, showing that the market is not expecting an acceleration of corporate defaults. Money flows into the riskier segments of the bond market remain healthy, albeit we note a more selective approach. Money still flows into investment grade funds in contrast to the leveraged loan segment, typically the lowest end of the credit spectrum. We maintain our call for a more prudent policy and our high yield credit funds still focus on the Ba/BB spectrum. The funds remain our favourite instrument to generate carry with a limited risk exposure.
Earnings season not to rock the boat
The US earnings season gathers momentum. Once again, the US companies managed to lower the expectations to a level that is easy to beat. Accordingly, we will see a high number of positive earnings surprises but little market reaction. What is more important for investors is the stock selection in a world of low growth and low inflation. We stick to our focus on the limited numbers of companies with a solid business model or companies with a track record of investor friendly profit distributions. Track record is a key word in this context.
I would like to conclude this week’s CIO Flash with the notion that we prefer listed companies that can be valued according to their profit history over candidates for IPO (initial public offerings) that are priced based on business models. Accordingly, we don’t draw any conclusion for the stock market from the recent events in the private equity space.
