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January 22, 2024 - Protection is becoming attractive again.

It feels strange to discuss about buying protection and quality assets, as the S&P500 hit a new record high and headlines are talking about a bull market. To avoid any misunderstanding, we too believe that we are in a new bull market that started from the lows of October 2022. But bull markets do not move in straight lines either and as we have entered the 5th year of the experiment we have been describing, we should proceed with caution. And protection is better to be bought when it is offered cheaper than a few weeks ago. To name just two examples, high quality bonds and gold have now returned to levels that have caught our attention again. Not to mention high quality defensive stocks, which have fallen out of favor (food & beverages for example) and should find their way higher at some point in the near future, while paying handsome dividends at the current price levels.

We had discussed at the end of last year how the perfect scenario envisaged by the markets back then, cannot be fulfilled in its entirety, as there are contradicting parameters in it. Just three weeks from that time, we see the first cracks in that scenario. The view that central banks will cut interest rates aggressively, starting in March is now being taken "off the table", not only because central bankers themselves have pushed it back with verbal interventions but also because the US economy is still not showing any signs of severe slowdown. Of course the situation in Europe is much different, with growth already at zero and Germany in recession, but will the ECB decide to move before the FED ? We doubt it.

The year has started with the ECB being (verbally) more hawkish than the FED. Bundesbank President Joachim Nagel said that it's too early to discuss cutting rates and Austria Central Bank Chief Robert Holzmann warned that rate cuts aren’t guaranteed this year. Later in the week, Mrs. Lagarde said that it is likely that the first rate cut would come only in the summer. We could get more information on where the ECB really stands this week, during the first meeting of the year (Thursday 25th) although it is unlikely to see any major change from what we saw about a month ago.

In the meantime, Eurozone's economy is already flirting with recession, albeit a shallow one, as last week the preliminary data from Germany confirmed a lower-than-expected economic growth estimate for Q4 of 2023. The German Federal Statistics Office published a report, according to which average annual growth was estimated at -0.1% in 2023, following growth of 1.9% in 2022. This annual growth release includes an early estimate for Q4 GDP, which amounts to -0.3% q-o-q, well below the forecasts for a small rebound (+0.1%) and the weakest quarter in 2023. The official numbers will be published at the end of the month, but we can already safely assume that growth in the Eurozone will be at zero, in the best case scenario.

In this context, we see again value in higher duration and high quality or government EUR bonds. Bonds have corrected in price quite meaningfully and longer-term yields have risen by about 30bp from the lows of last December, as the March rate cut is now priced out. But rate cuts should be coming during the summer, as the impact of higher rates should finally be felt in the real economy. The 10-year US yield rose to 4.15%, up from 3.85% just a few weeks ago and the German equivalent rose to 2.35%. If we add to the German risk-free rate, the rather decent spreads of 70-80bp of the high quality corporate bonds with duration of 6-8 years we end up with returns of a little over 3%. Although this might look low now, any return of the March-cut scenario or a severe slowdown in the economies in the next 6-9 months will make these positions profitable from these levels.

US December Retail Sales were stronger than expected, demonstrating a still strong consumer. They were reported up by 0.6% vs the previous month and ahead of consensus for a 0.4% monthly increase. The figure is even stronger if we take into account that the previous months were revised slightly up. Within the details of the report, non-store retailers, which includes on-line purchases, posted a 1.5% increase in December. Sporting goods sales rose by just 0.3%, but clothing sales jumped by 1.5% from 1.2% in November. Motor vehicle sales moved up another 1.1% in December. On the other hand, eating out stalled completely on the back of a 1.7% increase in November.

The November 2024 elections in the US have already started influencing financial markets. Mr. Trump won the key state of Iowa during the party's primaries, which will decide who the Republican candidate for the Presidency will be. Then over the weekend Mr. DeSantis decided to drop out of the race and endorsed Trump. He is now not only the favorite to become again the Republican leader, but he is also shown to be marginally ahead of Mr. Biden at various polls. These news have sent Chinese equity markets slumping and the USD rising by more than 2%, while defense companies moved higher.

Equity markets had a rather mixed week, as the S&P500 rose by 1% to finish at a new record high while Europe was broadly down by more than 1%. Within Europe, Switzerland continued to perform better, albeit with a negative 0.7% return for the week. In terms of sectors, we experienced what happened in the first six months of last year, where most sectors were down but Tech-related companies were rallying. Last week Technology was the only positive sector for the week (+4%) and all other sectors were down, with Energy and Materials being the worst (-3%).

In corporate news, shares of Swiss luxury company, Richemont, jumped by more than 10% as the company posted better-than-expected sales growth. The owner of Cartier, among other brands, said that revenues in the previous quarter grew by more than 8% (on constant foreign exchange) compared to consensus for 6.5%. Growth of 12% in its Jewelry business stood out within the details, as this division attributes the majority of the profits to the company. Tesla announced more price cuts in Europe and Asia, as demand for its electric vehicles seems to have slowed down. Its shares are down almost 15% since the start of the year, as the company is set to report its quarterly numbers this week.

Chart of the Week : Gold approaches interesting levels again.

As the FED'S Chairman, Mr. Powell made the famous pivot in December, which led the market believe that aggressive rate cuts are coming this year starting already in March, Gold shot higher and reached momentarily a new record high. The above chart shows how the price of Gold (in dark brown) moved in sync with the probability of a rate cut in March (beige) for the last few months. We see that as the probability for a rate cut was increasing, so was the price of Gold and it reached its record high at the same time that the probability reached almost 100%. Things have changed since then, and now that probability stands at less than 50% and Gold has fallen back close to 2000$, almost 5% from its peak. Traditionally, Gold is negative correlated to higher interest rates and a higher USD, two conditions that have simultaneously been met this year. Moving forward however, the recent drop in prices is making the yellow metal interesting again to start buying, for investors who wish to protect against a rapid fall in the USD or a major geopolitical event.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.


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