With equity indices making further gains in May, particularly in Europe (MSCI Europe was up 3.05% on the month compared to 0.55% for the S&P 500), the markets have continued to welcome the upturn in activity in developed economies, made possible by the simultaneous easing of the pandemic on many continents and the introduction of fiscal packages on both sides of the Atlantic.
Meanwhile, the OECD has confirmed this trend, raising its forecast for global economic growth to 5.8% (from 5.6%) for this year and to 4.4% (from 4.0%) in 2022, whilst China has returned to record levels of manufacturing output.
However, with the recovery accelerating, the spectre of inflation has somewhat tempered market euphoria: in the upstream part of certain supply chains the change of pace has led to bottlenecks (both in timber and semiconductors for example), whilst further down the chains we have seen sharp price rises in the USA (the latest figures show inflation of an annualised 4.2%). Although US long-term interest rates have risen from their low point in 2020, with the 10-year rate up from 0.5% then to 1.6% now, this has not yet had a knock-on effect in Europe, and rates remain well below their pre-Covid levels (2% at end-2019, over 3% at end-2018). Even so, attention is now turning to central banks, particularly the Fed, where the fear is that it will start to tighten its monetary policy and thus remove some of the fuel needed to keep global stock markets on the right track. How big and how long-lasting will inflationary pressures be over the next few months? We believe that the nominal rates seen over the last decade have already seen their low point, but at this stage it is hard to predict a return to high real rates in the near future.
A faster increase in interest rates could have a marked effect on highly valued assets and drive a pivot, which has already begun, from growth stocks, such as those listed on the NASDAQ, towards more cyclical stocks, where valuations are still low, such as European banks, infrastructure companies and carmakers (Stellantis, created by the merger of the PSA and Fiat groups, gained 18% over the month). Over the longer term it will be real growth in revenue and business levels that will separate companies; we will therefore need to maintain our focus on individual stock selection, with a case-by-case approach informed by reported figures. The announcement by Sonova – a Swiss hearing care company held by Clartan Ethos – of profits well ahead of expectations was thus welcomed by an 18% jump in its stock price in May. Our methodology is based on this stock-picking discipline. It is worth noting at this point that our analyses of company values are carried out using a conservative ‘standardised’ risk-free rate of 4% (in Europe the German 10-year rate is still negative).
Against this background, Clartan’s funds made gains in May, with rises of 0.4% for Patrimoine, 1.1% for Evolution, 2.6% for Valeurs and 3.6% for Europe.