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European Investment Conference 2024

17 September 2024 | Frankfurt am Main

Economic resilience in Europe? Fireside discussion with a European Economist.

Key takeaways

  • Germany faces continued economic uncertainty it deals with the end of cheap energy (following Russia’s invasion of Ukraine) and cheap labour (because of an ageing population and the impact of Covid). A process of ‘creative destruction’ is taking place as old industries are replaced by new ones, but the government is currently slowing this down with fiscal subsidies. The government needs to accelerate the transition to an economy that is not dependent on cheap energy, either through clearer policymaking or by allowing market forces to do the work.
  • Inflation concerns in Europe are easing, but it would be too early to say that Europe has solved its inflation problem. Given the size of the inflation shock and the fact that it is still being transmitted into wage costs, it is likely that inflation will continue to fluctuate sharply over the next few years. It will take central banks a while to understand how to set interest rates to keep inflation at the target level while also promoting growth.
  • Trade tensions between the US and China are affecting supply chains to Europe and are one of the main reasons that investment in Europe is weak. Put simply, companies do not know whether to build new factories in China or closer to home. The forthcoming US presidential election is also creating economic policy uncertainty as a Donald Trump victory may result in new tariffs against imports, which would distort global supply chains and likely hurt the European economy. 

Global market outlook: How central bank policy could impact your portfolio

Key takeaways

  • Any significant weakening of the Chinese economy could result in a global economic slowdown in the first half of 2025. However, this is likely to be short-lived as central banks will respond quickly with further rate cuts. In the second half of 2025 next year we will likely be in a world of low rates and improving growth, and a clear pick-up in manufacturing activity.
  • A continuation of trade tensions between the U.S. and China may result in considerable economic uncertainty. At present, companies do not know whether to build new factories in China or closer to home. The US presidential election is also creating economic policy uncertainty as a Donald Trump victory may result in new tariffs against imports, which would further distort global supply chains. 
  • The dominance of the ‘Magnificent Seven’ stocks has pushed leading market indices to new heights this year. However, we may also have witnessed the first signs of the end (or at least a decline) in index concentration and the beginning of a broadening of the opportunity set. Small cap stocks should benefit from further interest rate cuts, as should financials.

Global Equity: A new era for global equity investors

Key takeaways

  • We are clearly past the peak in capital expenditure spending on artificial intelligence (AI). While the initial infrastructure cycle for AI may be peaking, we are, however, only just beginning to see the potential benefits of AI in other areas. 
  • The other seismic shift of recent years has been in health care innovation, specifically the development of artificial incretins (GLP‑1s). We feel much more optimistic in the short term for this area as the benefits of these drugs keep expanding. 
  • We believe we are in the early days of these disruptive technology innovations. At this time, both innovations look to benefit the incumbent, but we are constantly testing whether there could be disruption to the incumbents. Active management will be important to participate and navigate potentially extreme outcomes in the market.
  • Building a portfolio that invests in technology and health care is important, but exposure here must be balanced with other areas such as energy, financials, industrials, and even consumer staples. These sectors have historically offered defensive qualities and steady growth that could potentially provide a buffer against potential market volatility.

US Equities: A time for balance in your portfolio?

Key takeaways

  • The US equity market outlook appears finely balanced. Headwinds such as slowing economic growth, high market concentration, full valuations, and election uncertainty are offset by a number of supportive tailwinds. These include robust corporate earnings, moderating inflation, and anticipated interest rate cuts.
  • Given these competing forces, a higher level of overall market volatility is expected to be a feature. While this can be unsettling, it is a positive backdrop for active, stock picking, as valuations and fundamental quality come sharply into focus.
  • That said, no other market is more thoroughly researched than the US equity market. This makes attractive, mispriced, opportunities harder to find. We are focused on finding quality companies with durable return potential – be it large cap or small, and growth or value oriented.

Making waves: Blue bonds a growing resource for sustainability financing

Blue Ecomony

Key takeaways

  • Under stress and severely underfunded, many water resources that make up the blue economy are in dire need of investment. Blue bonds can potentially help address some of these critical environmental and social problems. They are particularly helping towards meet the United Nations Sustainable Development Goals (SDGs) no. 6 and 14. 
  • Emerging markets (EMs) currently experience significant impacts from water-related pressures, while also facing difficulties in accessing funding, making these areas a primary focus. Blue investments in EMs could extend to other SDGs. 
  • Blue bonds are a relatively new segment within labeled bonds and have the potential to grow to a similar size as the green bond market. 

Diversified Income Bond

Key takeaways

  • Investors may be looking for new sources for income with central bank rate cuts on the horizon. The global fixed income landscape offers ample opportunities for active asset managers who can allocate across sectors, countries, and currencies.

Key risks and opportunities: What next for US large caps?

US large cap growth

Key takeaways

  • The narrative around artificial intelligence (AI), strong corporate earnings, and monetary policy, which is leaning in a more dovish direction, are the main factors shaping the current environment for large-cap growth equities.
  • The AI investing conversation is moving beyond the “picks and shovels” providers and on to the “application owners” as investors’ focus shifts to monetisation. We are at the point in the cycle where companies and customers need to see tangible benefits coming from AI adoption. 
  • The “Magnificent Seven” continue to exert a significant effect on the market. Historically, narrow market leadership is not abnormal but in this instance, the magnitude and duration of the narrow leadership has been unusual. However, after adjusting for this small cohort of companies, large-cap valuations remain well priced. 

Emerging Markets: Attractive Opportunities amidst Uncertainty

Emerging Markets

Key takeaways

  • Emerging markets (EM) corporate bonds are the most defensive way to access EM return potential. They offer a shorter-duration profile, diverse regional exposure, and a range of sectors and credit quality. 
  • Corporate debt provides an attractive income potential with a yield premium that is potentially more attractive than developed markets corporate debt. It also offers the opportunity to benefit from the relatively strong macroeconomic backdrop in emerging markets. 
  • Security selection, underpinned by a bottom-up driven investment process, can potentially offer meaningful opportunities. Fundamental research and local expertise can take advantage of the informational asymmetries inherent in the asset class to add value.

Navigating the AI cycle

Key takeaways

  • The largest technology companies are the most cash generative businesses in history and are funding their artificial intelligence (AI) expenditure through their enormous free cash flow generation. We may, however, be at peak year-over-year growth in cloud capital expenditure.
  • Valuations for the technology sector are nothing like where they were in the late 1990s dot-com era, where the internet bubble led to extreme valuations. Valuations are much more reasonable due to the huge earnings growth these companies are generating. 
  • At the same time, for investors, it is a harder set up than it was 12 months ago. Capital expenditure growth is clearly decelerating, and valuations aren’t as attractive as they were. However, we believe the AI build out will continue to develop over the next 3-5 years as AI adoption continues. 
  • Other trends outside of AI include cybersecurity, enterprise software, e-commerce, and emerging markets. As threats continue to increase, we see a consolidation of cybersecurity vendors who can deal with a more dangerous world. Meanwhile, digital commerce penetration and FinTech utilisation has now normalized post-COVID, while digital advertising will benefit from advancements in AI and machine learning. 

How to enhance your US equity allocation via small-mid caps led by a bottom-up stock selection process

US small and mid caps

Key takeaways

  • Much of the commentary supporting the investment case for US small and mid caps continues to focus on expected interest rate cuts – lower rates equal a better environment for small caps. However, history shows that smaller companies have outperformed during higher rate/inflationary periods and are not dependent on rate cuts.
  • The outlook for US small and mid caps is positive, but the investment case is structural in nature, and so not dependent on rate cuts or low inflation. Large exposures to energy and industrial sectors within small/mid cap indexes are expected to drive relative outperformance, as we anticipate durable price inflation in these areas.
  • There are structural drivers in place for US small/mid cap companies that can potentially help them outperform larger counterparts over a multi-year horizon. The combination of positively inflecting fundamentals and supportive relative valuations, present a compelling investment backdrop.

Opportunities in credit in an uncertain market environment

Key takeaways

  • The tightening of spreads is raising questions about valuations in credit markets, but yields remain attractive and continue to offer investors a compelling source of potential income.
  • The combination of strong technicals, healthy fundamentals, improving credit quality and historically attractive yields are supportive and should continue to drive flows into credit markets.
  • In the current climate of tight credit spreads and macroeconomic uncertainty, however, bottom-up research and a risk-aware approach are imperative to navigate the asset class. 

202409-3865128