As the summer holiday period comes to an end in September, equity markets are showing impressive gains for the first eight months of the year, with figures approaching 20% (18% for the STOXX Europe 600).
This progress reflects the confirmation, month after month, of a recovery in the global economy, which has shifted from a period of rebound to a cruising speed that is less spectacular but more sustainable.
After eighteen months of living collectively under the threat of the pandemic, it now appears that sentiment has been ‘vaccinated’ against the virus.
Granted, the pandemic persists and continues to affect mobility and social life as new infection hotspots spring up here and there; however, its impact on the economy is fading thanks to the support provided by public authorities, such as the crucial contribution of central bankers. On this last point, the Fed in the US is now preparing investors for a stabilisation of its balance sheet over the next twelve months, in other words a managed reduction in its asset purchasing, to be followed perhaps by a second phase that will bring interest rate hikes. The ECB has followed suit, given the rise in inflation (estimated at 3% in August for the euro zone). Bond markets have echoed these moves, with a correction in 10-year rates that in France nevertheless remain at the very low level of zero. By geographical region, the USA is seeing the strongest growth, followed by Europe and with Asia bringing up the rear.
The squeeze between slower growth and a resumption of inflation is thus resulting in increased vulnerability for equity markets, some of which have seen their valuations flare up somewhat over the past 18 months. On top of this there has been the tightening of regulations in China concerning the areas of education and the internet, which has accentuated the volatility of Chinese stocks such as Alibaba and Ping An, which we hold, but also of the European luxury goods sector over the month. Conversely, defensive stocks which had languished at the beginning of the year have begun to make up lost ground (Roche is one example), whilst shares that had been punished have returned to form (e.g. Atos or Unibail). In this context, our compartments made small gains over the month. We are now in a transitional sequence for markets after the rebound seen over the last nine months. Our attention has shifted to the recovery in company revenues relative to 2019, rather than the economic recoveries over the current year. Looking beyond the empty debate between a return to normal or a ‘new normal’, we will look, company by company, at the best franchises each has to resolve the new equation between operational performance, environmental awareness and health protection.