This crisis will increase the polarization of performance between the “digital economy”, and the traditional economy.
08.05.2020 | 10:47 Uhr
A few interesting things happened since last week which matter for our investments:
-> Countries are progressively organizing their respective deconfinements, as planned. We’ll only know the consequences of these measures later, and how they evolve. But initially, they are likely to satisfy some pent-up demand, giving the sentiment that the worst of the economic downturn is behind us. And of course, compared to March, and even more to April, the next two quarters should indeed show a sharp rebound. The problem is that this won’t constitue a V-shape recovery, but only a temporary rebound from an extremely low base. The real question is growth and earnings from Q4 onwards. And it seems to us there is still too much complacency about 2021 earnings growth. Hence our cautious stance overall, and our utmost preference for growth stocks over cyclicals. No change there.
-> Second interesting development since last week, the Trump Administration has clearly decided to toughen up again his rhetoric against China. We do not think major aggressive economic measures, such as tariff increases, are likely before November as it would make the US economy even weaker. But it already is economically very difficult right now for China to honor its commitments to purchase industrial goods and commodities from the US, because they simply do not need them. So the tension could also build on this shortcoming. And now there is clearly a contest building up now between Joe Biden and Donald Trump to win the trophies with the US opinion of the toughest guy on China. This is certainly not going to be conducive to an easing in the degree of policy uncertainty. This can only vindicate our cautious stance on markets, in particular when you think about the positive impact that the commercial truce had on markets less than four months ago.
-> Turning to Europe, we had this week the important ruling by the German Constitutional Court criticizing the asset Purchase Program of the ECB. This practically does not affect the capacity of the ECB to act for the time being, all the less so that the ruling does not concern the dedicated PEPP program created to fight the consequences of the pandemic. In addition, a very strong case can certainly be made that the ECB has no obligation to respond to a German court. The problem, as discussed previously on this webinar is wider. It is the lack of political convergence on fiscal policy at the European Union level. This was most recently evidenced by the failure of the heads of Governments to agree on a dedicated European Recovery Fund. The consequence is that at least, for the time being the ECB has to do most of the heavy lifting again to deal with this crisis. Therefore, in particular for the weaker countries in the EZ, any thing that challenges the ECB’s “whatever it takes “implicit promise and capacity is obviously not good news for peripheral countries, as you can see on this slide. As a reminder we reduced to very low levels in the past weeks our exposure in all our Patrimoine and fixed-income funds to peripheral sovereign debt.
-> Finally, I would mention among the important pieces of news since last week, the first Quarter earnings reports. Analysts this time had quickly adjusted their expectations, so that by and large after two thirds of companies having reported so far, a little less in Europe, quarterly earnings did not bring huge surprises. They are down -16% on average in the US compared to last year’s first quarter, while in Europe the trend really worsened in the results published in the last week, so that the fall in earnings is now of about 30% in Europe, which probably contributed to weaker markets since last Thursday. It certainly reflects the bigger weighting of financial and cyclical industrial companies in the European indices, compared to the US. It is thereby an obvious reminder of the importance of stock and sector selection when you invest in European equities. Of course, the numbers themselves are not really meaningful as Q1 was exceptional. But in the US, the comments made by companies like Facebook and Google, were interesting, because they confirmed that their ad revenues, after obviously having collapsed in February march were already stabilizing in April. This vindicates the notion, for anyone not convinced yet, that this crisis might actually increase the polarization of performance between the “digital economy”, and the traditional economy. And within the digital economy, the “winners take all” principle of platform companies is likely to favor the early disruptors who will gain further market share from weaker players.
So in conclusion, no particular inflection in fundamentals to adjust to from last week, so that the positioning of our main funds is broadly unchanged. We are set up to deal with a world with less growth, less margin and less inflation; more debt, more State intervention, a little less globalization, more tech, more healthcare, more ESG, and more instability.
Wir laden Sie gerne auch zur deutschsprachigen achten Web-Konferenz mit Gergely Majoros, Mitglied des Investment Committee bei Carmignac, am heutigen Freitag, 08. Mai 2020 um 15:00 Uhr ein:
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