Monthly House View - June 2024 - Download here 

As we celebrate the 80th anniversary of D-Day and the Battle of Normandy, 6 June could become an important date for the financial markets. On 6 June this year, the European Central Bank (ECB) council is meeting to take an historic decision on monetary policy and likely cut interest rates for the Euro Area before the United States (US) Federal Reserve (Fed).

ECB President Christine Lagarde had defined the central bank’s actions as “data-dependent” and not “Fed-dependent”. With inflation falling faster than expected, reaching 2.4% in May, compared with a peak of 10.6% in October 2022, we expect the ECB to cut its key rates four times this year from June, and potentially two to four times next year to bring them down to 2 or 2.5%.

 

DIVERGING MONETARY POLICY PATHS?

In contrast, US inflation has been a bit stickier, leading Fed Chairman Jerome Powell to clarify to investors that he did not expect the Fed to raise rates any further, and what was needed was to be “patient and let restrictive policy do its work”. There is therefore ample evidence that the disinflation process in the Euro Area is stronger than in the US and this is the main reason for the diverging monetary path. As for the Fed, the market remains divided. After a reassuring inflation reading in May, the market is now forecasting two cuts from September, compared with seven at the start of the year and one before the inflation figures. We still have three cuts for 2024 and three more in 2025 to reach 4%, but a sequence of two and then four cuts is clearly possible. Jerome Powell has recently regained credibility on his inflation rhetoric, with the latest fall in retail sales putting the Goldilocks scenario back at the centre of investors’ mind.

 

AMPLE LIQUIDITY

At the start of the year, we argued that the massive inflows in money market funds in 2023 would be an important force to support equity markets, as this liquidity could shift to riskier parts should rates come down.

Inflows continue to be strong in the US this year, at over 200 billion dollars, but at a much slower pace than last year, while flows into equities amount to 150 billion dollars so far, almost equivalent to the flows for the whole of 2023. Further reallocations are likely, but the key question will be to which part of the market investors will start to contemplate.

At a recent global markets conference in Paris, over 52% of investors still expect equities to deliver the highest return this year with a majority “moderately bullish”. They are not alone: companies actually continue to buy back their shares at a record pace. In May, Apple’s announcement of a new 110 billion dollars’ share buyback plan is the largest in US history: the company is responsible for the top six of the 10 largest share-repurchase plans. Since 2012, it has reduced the number of its shares by 40%.

A new rotation is beginning to emerge with the improvement in the macroeconomic situation in Europe. However, small caps are still lagging, with the MSCI Europe Small Cap Index lagging its large cap equivalent by 30% over the last three years, but we are now warming up to the asset class. With very attractive valuations, decent earnings growth and massive capital outflows in the last few years, there could be a renewed appetite for small caps. While US equities along with emerging market equities continue to be attractive, we think investors are now exploring what is missing in their portfolios and looking to expand beyond what they already own, and small caps could become a compelling alternative.

In this edition, we have a new section on Private Markets and we invite you to read Matthieu Roumagnac’s article on infrastructure. Please note that this publication will henceforth include a Private Markets section on a quarterly basis.

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_{Monthly House View, 23.05.2024. - Excerpt of the Editorial}