Financial markets: Analysis and convictions of CPRAM - October 2024

Malik Haddouk, Director of Diversified Management, and Juliette Cohen, Strategist, decipher the markets, and Julien Levy-Kern, Diversified Portfolio Manager, shares his convictions on the themes to follow.

A portfolio composed of 60% stocks and 40% bonds had its best quarter of the year, with both bonds and stocks recording positive returns.

Signs of a slowdown in the US labor market and inflation under control have prompted the Central Bank to begin its rate easing cycle with a significant 50 basis point reduction.

US 2-year rates declined by more than -110 bps for the quarter, compared to 61.5 bps for 10-year rates, continuing the flattening of the yield curve, a phenomenon also observed in the eurozone but to a lesser extent.

Stocks also reached new highs, with strong performances towards the end of the quarter, as the chances of a soft landing improved with the Central Bank's announcement of its intention to preserve growth at all costs.

Emerging market stocks outperformed due to the weakening dollar, while signs of coordinated stimulus measures from China clearly contributed to this development. In fact, Chinese stocks soared more than 15% in the last 3 days of September.

In the developed world, US stocks outperformed, but the Nasdaq lagged behind. Small and mid-cap stocks rebounded significantly on both sides of the Atlantic. Europe continued to underperform, with France lagging behind due to political uncertainty. Japanese stocks corrected.

Finally, markets generally faced difficulties leading up to the US elections. Middle East tensions pose another problem, but end-of-year seasonality is generally positive, with stocks tending to rebound after elections and, more importantly, after rate cuts if no recession follows.

Undoubtedly, the Chinese stimulus measures. Indeed, the stimulus measures taken by China to support the real estate and stock markets are numerous and targeted. They have been welcomed by local stock indices, which have increased by more than 25% in a few days and have given hope to the emerging asset class as a whole.

The euphoria generated by the announcement of the stimulus measures continues to support sentiment. However, the frantic trading of last week could also raise concerns about the existence of a bubble, given the overbought levels reached by the stock markets.

Nevertheless, the valuation of the Chinese markets remains attractive, with price-to-earnings ratios below 10 for local domestic equities. The key to sustaining gains will be whether Beijing makes a detailed announcement of its fiscal and budgetary policy before the outcome of the US elections. A recovery in domestic demand in China would also greatly contribute to reviving the global manufacturing recovery and should stimulate certain sectors such as industries and materials.

Therefore, we are increasing our exposure to the emerging asset class in our portfolios.

Jerome Powell presented the 50bps cut by the Fed as a larger preventive reduction that is intended to support the scenario of a soft landing. After concerns about a recession risk during the summer, a soft landing is now the most likely outcome. In this context, the MSCI World gained 1.80 dollars in September.

The significant underperformance of cyclical stocks compared to defensive stocks at the beginning of the month is in line with the rules of a soft landing. And following these rules, cyclical stocks, up nearly 3% in dollars for the month, have started to recover compared to defensive stocks, which were down 1.2%, following consecutive interest rate cuts by central banks. By drawing parallels with previous phases of a soft landing, the technology sector emerges as the cyclical sector to select. Despite being overexposed, ultimately with the rate cuts and the end of growth fears, the M7 stocks have recovered their losses and, with a 6.5% increase for the month, have reached their highs again. More broadly, innovation themes are leading, with Artificial Intelligence up 3.2% and Digitalization up 4.8%.

The gap between cyclical stocks and defensive stocks widened further at the end of the month following various stimulus announcements from China. While the relative performances of the Mining, Automotive, and Luxury sectors are near their Covid lows, it is not surprising that the announcement of China's stimulus measures has sparked renewed interest in these sectors, even if it mainly involves short covering. Related to these sectors, the Well-being/Lifestyle and Natural Resources themes are up 2.8% and 3.3% respectively.

Our key points

We will remember from this month of September, the positive performance of most equity markets with the very notable outperformance of China and Asian stock exchanges due to monetary and fiscal support announcements.

On the interest rate side, the start of the Fed's easing cycle and the continued rate cuts by other major central banks led to a downward movement in rates and a steepening of the yield curves.