Navigating uncertainty and risks.
While the world economy benefited from the so-called “peace dividend” for decades after the fall of the Berlin Wall, the geopolitical risks, with the war in Ukraine and the recent tragedy in the Middle East, are increasing daily. Partly given the increasing risks, the FED (5.5%), the ECB (4.0%) and the BoE (5.25%) decided in October to leave interest rates unchanged. They were helped by the continued decline in (core) inflation. However, with all the geopolitical risks, a repetition of the inflation scenario of the 1970s cannot be ruled out. Central Banks will, therefore, continue to maneuver extremely cautiously and remain “data dependent” for the time being.
A big windfall in October was economic growth in the US (2023Q3 +1.2% QoQ). This is in sharp contrast to the figure in the Eurozone (-0.1% QoQ). It is remarkable to see how poorly the German economy has been performing for some time. Not only did the German economy show a contraction in 2023Q3 (-0.1% QoQ and -0.3% YoY), but the German economy has also shown little or no growth on balance since 2019Q4. Germany is too dependent on expensive energy, production of gasoline cars and exports to China. All three are problems that cannot be solved in the short term.
The strong growth of the US economy in 2023Q3 was (again) mainly due to the consumer. Remarkably, consumption has been rising considerably more than income for two years. This was made possible by the massive income transfers from the US government to households in late 2020/early 2021 during the Covid period. These extra savings buffers have been used by families since 2021 to dissave and consume excessively.
A fundamental explanation for the strong economic growth in the US since 2019Q4 is government spending. While the FED tried to bring inflation down in the past two years by slowing economic growth, the US government has continued aggressively stimulating the economy. The US government debt, as a percentage of GDP, has risen exponentially in recent years, and this partly explains the significant difference in economic growth with the Eurozone. Ultimately, this American government spending, like excessive consumption, cannot be sustained indefinitely. It seems only a matter of time before economic growth figures in the US will decline significantly. American corporations already seem to be taking this into account.
After negative returns in almost all asset classes in 2023Q3, October was also a bad month for investors in equities and bonds.
The picture was more mixed for commodities. The rise in gold was particularly remarkable. The price increase resulted from increased geopolitical tensions and purchases of gold by the Central Banks. Also notable is the exponential growth of US debt.
For equity investors seeking exposure to Gold, “Gold Miners” shares are a cheap alternative but require a much higher gold price to spike. Also, dividend shares are again significantly undervalued, just like in 2020.
Historically, November and December, as opposed to September and October, are good months for stock investors. We certainly cannot rule out that there could also be an end-of-year rally this year. However, given the geopolitical risks and economic prospects, we mainly see this as a bear market rally. In addition, it is remarkable that analysts have had to continue to adjust their profit forecasts downwards for quite some time now.
In addition, despite the increased interest rates, corporate interest costs are still historically low as a percentage of corporate profits. Given the Corporate Debt Maturity Distribution, this will change rapidly in the coming years and become an increasing problem, causing corporate profits to disappoint and the number of bankruptcies to rise sharply.
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