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May 6, 2024 - Sell in May and go away (?)


The quick answer is no. At the start of everyone's career in the investment world there are quite a few catchy clichés that they hear from the more seasoned players. "Sell in May and go away" is one of them. And despite the fact that statistically there have been Mays that were bad for the equity markets, we do not wish such seasonal patterns to guide our investment decisions. Especially when this May comes after a horrible April, which statistically is supposed to be a good month.


Having said all these, we do remain vigilant as the correction which was correctly predicted at the end of March might still have some more room. But maybe not right now. And we would be using any weakness into the summer months to add to positions of the stocks we like for the next 12-18 months. The two main issues are : i) how inflation is going to behave in the next two-three months and ii) consequently what the central banks' next moves will be. No one has the answer to these, so there is really no point in trying to forecast them. Being invested in quality growth names found in Technology, Consumer Discretionary and Staples looks to be the best tactic for the uncertain next few months. The more cyclical and lower quality names (small caps, autos, profitless companies to offer just few examples) look more vulnerable at this stage.


The FED left "all doors open", although rate hikes might carry a very low probability. The most important message out of the meeting is the acknowledgement of a “lack of further progress” towards the inflation goal, but at the same time, the bias remains towards when and not if rate cuts will take place this year. Mr. Powell made it it clear that monetary policy is sufficiently restrictive (i.e. it is highly unlikely there would be a need for more hikes) but he did not rule out the possibility of the terminal rate being even higher. In his own words: "I think my expectation is that we will, over the course of this year, see inflation move back down. That's my forecast. But I think my confidence in that is lower than it was because of the data that we've seen". All in all, the data on inflation, unemployment and GDP growth in the next three months will dictate whether we are done with rate hikes for good and moving into rate cuts, or whether we will re-live part of 2022 again.


Eurozone April inflation was broadly in line with expectations. The headline number remained unchanged vs March, at 2.4%. The Core CPI slightly disappointed by falling less than expected to 2.7% (consensus: 2.6%), but still an improvement compared to the 3% in March. On the positive side, both goods and services inflation fell in April. Looking forward, services inflation appears to be more sticky, despite the improvement and wages continue to post a significant risk for inflation to reaccelerate in the coming months. Overall the data are consistent with the ECB cutting rates in June, but whether it will continue cutting until year end or stop is anybody's guess.


Eurozone's first quarter economic growth was better than expected. The flash estimate which was published last Tuesday showed that the region's GDP rose by 0.3% q-o-q up from -0.1% in the last quarter. Amongst the four biggest Eurozone economies, France (+0.2%), Spain (+0.7%) and Italy (+0.3%) and even Germany, the economic underperformer for some time now, surprised positively with a growth rate of +0.2%. Overall, the data showed that the year has started on a stronger foot than previously expected, which complicates matters a bit with the ECB's intentions to start cutting rates.


Stronger than expected economic activity and a still robust labor market lead to higher wages which then spirals in higher consumer prices of goods and services. Unless the companies decide to bear the cost and lower their profitability, which of course is not going to happen, despite the related call by ECB's President who publicly said that companies' operating margins must fall, in order to have a sustainable drop in inflation. Operating margins will fall only if demand falls, and demand will fall only if economic activity slows down again.


But the US labor market finally showed some signs of weakness in April. The monthly non-farm payrolls rose by 175k, less than expected (205k) and much less than the 300+ of the previous month. Most importantly wages grew by less than 4%, alleviating some of the recent fears about wages posting larger-than-expected growth. Unemployment rose to 3.9%, a little worse than expected.


Important news came out China as the April Politburo meeting set a more supportive tone on the property market. Although there were not major changes since the previous month, the April meeting acknowledged weak domestic demand and most importantly the need to ensure delivery of homes, to adjust property policies and consider measures to help digest the existing unsold inventory of properties. Analysts commented that the fact that the government is talking about "property destocking" for the first time in 9 years, shows that the property sector is becoming the focus of the government. Property destocking, or in other words getting rid of the unsold inventories so that developers can receive cash and breathe again could be done through the Zhengzhou model: local governments acquiring secondary homes for upgrades as well as via a national platform that buys unfinished projects and converts them to social housing.


Chinese equities continued to attract fresh capital, as Hang Seng rose to the highest level since the last quarter of 2023. It posted a further 4.5% gain last week. Overall, it was a mixed week for global equities. The US markets outperformed, as corporate results by Apple and Amazon, to name but a few were positive, and Nasdaq finished 1.5% higher, boosting the S&P500 by 0.5% for the week. European markets slumped by 1.5%-2.0% , with the Swiss SMI (-0.6%) posting a better performance this time. In terms of sectors, Energy (-0.2%) was the only one finishing in the red, as oil prices fell by more than 5%. The move confirms our view two weeks ago to start taking profits in energy stocks.


Bonds had a volatile week, but ended with small gains (lower yields). The 10-year US yield is back closer to 4.50%, down 20bp from the recent high and the German equivalent is trading below 2.50% again. As mentioned several times, the spikes in bond yields creates buying opportunities in high quality or AAA government bonds, which will work fine when and if turmoil hits the markets whether due to a geopolitical even or a recession scare.


Chart of the Week : April was a brutal month for most equity markets, save for China.


The above chart shows the performance of some select indices for the month of April. Although overall it was a rather brutal month for equities , China (in green) managed to post a mini-rally by more than 5%. The Euro Stoxx50 (red) outperformed its US peers falling by almost 4% while Nasdaq (grey) was the worst performer with a 4.5% loss. One month does not constitute a trend of course, but we have reasons to believe as mentioned before, that Chinese equities could continue performing well and possibly outperforming the other major markets in the next 3-6 months.


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 : FactSet, Photo:: Nadia Sanowar

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