The European renaissance theme gained further ground last week, thanks to the man who was elected with the MAGA motto. Our continent has been scolded for its lack of cohesion, bureaucratic obstacles and lack of growth initiatives, and probably rightly so. Its equity markets have been underperforming their US peers for almost 15 years, to the point that the global MSCI World Index has now more than 65% weight in US equities. As a point of reference, at the turn of this century, Europe and the US had an almost equal weight in this global index, comprising each about 35% of it. And there have been good reasons for this long-term US supremacy : higher productivity, a flexible labor market, Tech innovation, less regulation, favorable tax environment etc. The markets are now betting, however, that the valuation gap between the two regions will close again, as Trump's policies and tweets seem to be doing more harm to America than to the rest of the world.
Opposite to the market consensus in early November that Europe will crash under the new US administration, the region's equity markets have flourished, at a time when US stocks are cracking under the selling pressure. Europe has been established for now as the markets' new darling. Trump is also at the verge of initiating a global wave of anti-Americanism, much like in the 1930s, with investors abandoning US financial assets, and global consumers sabotaging US products. The US consumer himself has slowed down spending on goods and services , as uncertainty has hurt sentiment. Businesses have curbed spending plans until they have more clarity on tariffs, on consumer prices and the direction of the economy itself. No one really knows whether this "Buy Europe" theme will withstand the test of time, as a fifteen year trend in favor of the US equities is a sacred axiom for the majority of the market participants, most of whom were not even working in asset management when things were much different (2000-2007) or many were not even at an age to comprehend the world around them.
In a week full of events, Europe managed to come out as the region with remarkable resilience and determination. In a barrage of developments, the European Union decided to direct part of the previous fiscal stimulus from energy investments to defense and more infrastructure spending, Germany removed its conservative hat moving closer to relax its debt limit, Britain offered close collaboration on defense issues. And last but not least there were even talks of making use of the massive Norwegian Sovereign Wealth Fund, which has more than 1.5 trillion EUR in assets, to help finance Ukraine’s defense. At the same time, the US President was publicly changing his mind by the hour on his favorite tariffs theme, he was freezing the US military aid to Ukraine, appearing as a true ally of Putin, in essence making himself look like a crazy autocrat in some off-the-map little country. Memes with North Korea's Kim bragging about not being the craziest leader in the world anymore flooded the internet. The markets' response was harsh.
And we are now at the point where the markets not only are pricing a European renaissance but are also hinting about a US recession. The speed at which the markets have turned from the "animal spirits" in the US to a recession and from a European doom scenario to the region's rebirth has been remarkable. Developments in currencies, bonds and equities have left investors thinking what comes next and tradersa are trying to cut their losses, on the Trump trades. The EUR vs the USD is now at the highest level since mid-September and has broken above its 200-day average, against consensus that the US will be the currency to own in 2025. We still have almost 9 months to finally know how the year will look like, but these are going to be nine volatile and eventful months.
Equity markets, as already mentioned, continued to diverge. US equities lost further ground, with the S&P500 posting a 3% loss for the week, but successfully rebounding (twice) from its very important 200-day moving average. The index is now 1.9% for the year. Nasdaq lost 4% and closed below its own 200-day average, despite Friday's small rebound. Europe had a positive week and primarily the German DAX index (+2%) to a new record high, before losing some ground and is now up almost 16% for the year. Volatility was high and some rotation into defensive sectors (food, pharma) was evident throughout the week, helping the Swiss SMI being the best index (+0.6%) below DAX.
However European government bonds suffered one of their worst day in the last 30 years, as the market responded to Germany's willingness to borrow more, by relaxing its debt limit. The 10yr bund reached a high of 2.90% and as a reference we note that the highest of the last few years was 3.0%, at the peak of inflation and when the ECB was raising rates. We had the view that the 2.50-2.60% area would be the best levels to buy back duration (5-7 years), but now the current levels are even more attractive and it is perhaps a good idea to roll some of the 2025-2027 maturities into 2030-2032. The US yields fell further, with the 10yr touching a low of 4.20%, as the recession theme is gaining ground overseas.
As widely expected, the ECB cut rates by 25bp to 2.5% . The key take-away from the press conference is that the Bank is in wait-and-see mode, with its future policy action crucially dependent on (a) the extent to which Europe will be hit by US tariffs, and (b) the impact that the substantial fiscal easing which is now underway in Germany and the broader EU will have on the Eurozone economy. Mrs Lagarde stressed that, amid "risks and uncertainties allover", the ECB would, "more than ever", pursue a meeting-by-meeting and data dependent approach". When pushed, she provided no hint whether the ECB would cut rates or pause in April. Another point of interest is that the ECB added the phrase "meaningfully less restrictive" to describe their monetary policy, which means that they seem to believe the neutral rate to be about 2%, so a pause could take place in one of the next two meetings.
The US labor market data for February showed the expected slowdown , but were better than feared. The monthly non-farm payrolls rose by 150k, and previous months were revised down by about 20k, but the effect of federal employees being fired is yet to be seen. As a reference the survey for these data took place prior to February 12th. When the recession theme appeared again after the data on late Friday evening, FED's Chairman J. Powell spoke about the economy, saying "it is in pretty good shape", which gave some relief to the US market and the courage to buyers to re-emerge. But today is another day, as President Trump, in an interview, declined to rule out a recession as a by-product of tariffs and government shrinkage.
Chart of the Week : Another typical 10-15% correction for Nasdaq ?
The rotation out of expensive stocks and regions that has been in force since mid-December reached a climax these last couple of weeks. Nasdaq is now 10% lower than its recent peak and many (including us) wonder whether this is another short-term correction or the beginning of something bigger. The answer based on the data that we have now is that a 10-15% correction for Nasdaq is rather typical and it has happened every year lately. Valuations have come down for Tech stocks to more neutral levels from expensive , given the somewhat slower growth ahead compared to the blistering years of 2023 and 2024. But whether this correction will morphe into a 2000-2002 type of avalanche is anybody's guess. Another 5-10% correction from current levels is of course not out of the question during this year, and if those levels are not met with significant volume of buying it would mean that the Tech fundamentals have changed significantly. The only catalyst for this to happen is the Chinese AI revolution and competition that will damp prices and the need for computing demand. A US recession would also be a reason for valuations to come further down. For now , it seems that we can continue our lives, thinking that this is a typical correction.
Disclaimer
• 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.
• Sources: Chart of the Week : KSH/Factset
Comentários