Financial assets are currently all inflated. Taking as a starting point the current levels of equity index valuations, the ultra-low spreads of credit (whether high yield or investment grade), the record highs of gold and bitcoin, as well as the extreme positioning and the various bullishness sentiment metrics, the next 12-month returns should, under normal circumstances, be very low, if positive at all. But this is based solely on fundamentals and historical patterns. And we all know that markets can move against fundamentals and against history, as long as there are enough investors/traders/speculators willing to keep buying until bubbles will eventually form. The famous "this time is different" adage is a bubble's best friend.
Within the inflated markets, there are pockets of true "Black Friday" sales, but these are sectors, regions and stocks that the market has abandoned. The question is whether there will be the typical "regression to the mean" and these discounted assets will eventually return to their normal, long-term valuations, which means that current prices are indeed an opportunity. Or, these assets are structurally damaged, permanently abandoned by the investment community and valuations will remain attractive but depressed for the foreseeable future. Does anyone wish to touch Chinese A-shares, which despite the rally, still trade at multi-year lows in terms of valuations ? Does anyone want to invest in European consumer names, trading at the lowest valuation of the last five or ten years ? Is there out there anyone willing to buy shares of Swiss pharma giants , who recently upgraded their profit guidance yet again, but their stock prices kept falling ?
The main pillar of the Trump trade, ie long US - short Europe is based on the potential tariffs, which however may never be enacted. Many advisers to the President-elect, including his recent choice of US Treasury secretary, have already voiced their view that tariffs are just a negotiating tool. Mr. Trump knows himself that an outright trade war with China and Europe will eventually bring the US equity rally to a halt, and this is something he really wants to avoid. But, if that is the case and tariffs are just a threat, then the big differential in US and European equity performance should very soon start to close again, in favor of Europe. If tariffs were to be placed, then the US equity rally will die (yields will spike, Europe/China will retaliate and the FED will raise rates) and this is the case certain European sectors are already discounting. Black Friday sales do exist, but no-one wants them.
The bond market is also in a very tricky situation, especially in the US. The credit spreads are near record lows , which means that investors should only be aiming at locking the yield-to-maturity and no capital gains are to be expected. Again, if we take the "Trump trade" at face value, then Europe's fate is doomed so EUR ultra-high quality bonds could offer protection and potentially small capital gains from current levels, but high yield bonds will suffer. The US bond market will also suffer from the Trump-trade, as an economic boost at a time of high inflation will first spook investors and then make the FED start raising rates again. Not to mention the high deficits situation that the bond investors are monitoring closely. Emerging Market bonds will also not have a great day, under the strong dollar regime, that the markets are dicsounting.
The Trump-trade returned last week, with US equities outperforming Europe and US small caps jumping 4.5%. The week started with a typical European sell-off , as the Ukraine war seems to be getting into a new phase with the use of long-range missiles by both sides, but ended with a strong rebound, especially in the beaten-down healthcare sector. Nvidia's results failed to ignite a semiconductor rally, as the market is more concentrated on the Trump-trade, which calls for Value/Small Caps outperformance. Energy and Materials were the top performing sectors.
The Eurozone Composite PMI fell by 1.9 points to a 10-month low of 48.1, notably below the neutral level of 50 and much weaker than expected (consensus: 50.0). The manufacturing PMI fell 0.8 points to 45.2, with manufacturing output down 0.7 to 45.1 and this was the 20th consecutive month of contraction. Arguably even more disconcerting was the 2.4 point decline in the Services PMI to a 10-month low of 49.2. The one-year business outlook continued to worsen sharply (-3.2 to 54.9). Within the country details, it is worth noting the collapse in sentiment in France, both in Manufacturing (43.2) and Services (45.7) and the small uptick in German manufacturing, but still being at very depressed levels (43.2). These levels are consistent with perhaps a 50bp rate cut by the ECB in two weeks time, and lowering interest rates below 2% within the first six months of next year. In contrast, the US Services PMI jumped to 57.0 from 55 and better than expected (55.3). Manufacturing remained subdued at 48.8, still a small improvement compared to September.
The EUR bond market reacted swiftly to the bad PMIs and yields fell by more than 8bp, across the curve. The German 10-yr finished the week below 2.25%, which is the lowest level since mid-October and confirmed our view that the recent rise in EUR yields was a buying opportunity. The USD yield curve did not move much, but yields remained lower than the levels seen right after Trump's victory (the 10-yr now standing closer to 4.40%).
President-elect Trump continued working on the formation of his government. He nominated his attorney, Mrs Bondi, as the controversial Mr. Gaetz decided to drop out from the US Attorney General beauty contest. The hedge fund manager and Soros' buddy, Mr. Bessent, is finally the nominee for the US Treasury, and this looks like a moderate choice, especially as Mr. Trump has floated the idea of having a "shadow" FED board to oversee Mr. Powell. Having a Wall Street guy, who deeply understands markets, as the head of Treasury guarantees that Trump's extreme ideas will probably not see the light of day. Mr. Bessent is also not very keen on imposing tariffs and an advocate of free foreign exchange markets, in contrast with Mr. Trump's affinity for a dollar devaluation.
Chart of the Week : Extreme bullishness does not always guarantee a bright medium-term future.
The Conference Board is a members-only organization which publishes a series of data, the most known of which is the monthly US Consumer Confidence index. One of the questions that the survey asks is the sentiment of US residents on the future of stock market prices. In the recent survey, as shown in the above chart compiled by Apollo Management, the percentage of people with a bullish view has now reached a record high of 51.4%. In the past, such high levels of positive consumer confidence in the stock market has been associated with short-term peaks, as it happened in 2018, after a similar Trump-related rally. Of course this metric cannot be the basis of decision making, it is just another sign that if history is any guide at all, the forward returns from these levels are doomed to be much lower than what people expect them to be.
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 : Apollo Management
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