Monetary policies, bond rates, equity markets: a story of changing cycles
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At their half-yearly press conference, LBP AM and Tocqueville Finance recently shared their outlook on economic conditions, bond markets and equities.
The macroeconomic environment is characterized by an unprecedented cycle. Over the past three years, a succession of shocks (Covid, war in Ukraine) has exacerbated inflationary pressures. The persistence of inflation has prompted central banks to tighten their monetary policies rapidly, breaking a historic trend of falling real interest rates.
Restrictive monetary policies are likely to force convergence towards low growth in most regions. "Our GDP growth scenario for 2024 anticipates a downward convergence between Europe and the United States, at 0.2%," explains Sebastian Paris Horvitz, Head of Research at LBP AM. And Chinese growth would maintain a moderate pace at 4.4% in 2024 in the absence of a significant stimulus plan, according to LBP AM's scenario.
Against this backdrop, inflation should continue to fall in the major countries, albeit very gradually, and this speed will depend on the easing in the labour market. "Nevertheless, the economic outlook remains highly uncertain, especially as we will have to get used to living with interest rates that are likely to remain permanently higher than in the past," adds Sebastian Paris Horvitz.
Bond assets: back to basics
While the Fed and the ECB seem to have finished raising key rates - according to LBP AM, the two central banks may even consider a slight reduction in rates from Q2 2024 onwards, albeit maintaining a high plateau for a long time to come - bond markets are regaining their appeal. "We're seeing a kind of return to normal in terms of asset allocation, where the bond component can once again fulfill its remunerative and shock-absorbing role," analyzes Guillaume Lasserre, Deputy Chief Investment Officer at LBP AM. Risk premiums have recovered, as has the potential for remunerating credit and liquidity risk. "Opportunities exist on all yield curves. However, we are particularly keen on relatively long maturities, especially sovereigns, whose yield-risk-protection triplet is once again very attractive," adds Guillaume Lasserre.
Under these conditions, building a portfolio of bonds held to maturity makes sense. With interest rates now at more consistent levels, visibility on expected yield to maturity is potentially attractive. "This type of 'buy & hold' approach also favours a higher level of sustainability in terms of SRI, provided that extra-financial indicators are used that integrate future trajectory scenarios," adds Guillaume Lasserre.
Equity markets: valuation levels offer little margin for error
On the equity markets, the question of the end of the bullish cycle is on everyone's mind, given several sources of uncertainty. Beneath the surface of stock market indices, which have generally been rising since January 1, there is an extreme polarization of performance, with "super momentum" working in both directions. Furthermore, earnings releases for Q3 2023 have got off to a poor start, and valuations are lacking an obvious upward catalyst. "Overall, valuation levels are fairly average today, leaving little room for error. Any disappointment on earnings releases seems likely to be punished by a stock market correction," says Michel Saugné, Deputy CEO of Tocqueville Finance.
As a result, stock selectivity is more important than ever. For example, the pharmaceuticals theme is currently showing interesting properties, in more ways than one. The sector's valuation is considered reasonable, not only below its historical average, but also 40% below levels reached during an economic crisis1. And the potential return on pharmaceuticals, close to 4%/year, is attractive among so-called defensive sectors2.
We should also mention the unprecedented enthusiasm for new uses of GLP-1 analogues, an intestinal hormone used in the treatment of diabetes. "In 2023, the boom in its use in obesity treatments will be a revolution for the sector," observes Michel Saugné, while the overall growth prospects of many players are underpinned by the acceleration of new product launches between 2024 and 2025. "This could represent potential sales of around 50 billion USD in 2025, for products launched by AstraZeneca, Bayer, Roche, Novartis and Sanofi alone3," says Michel Saugné.
"In short, we don't think the sector's bullish growth prospects are reflected in its valuation multiples", he concludes.
Disclaimer: The opinions expressed (i) are considered reliable by LBP AM and Tocqueville Finance and founded or justified by the economic, financial, stock market and regulatory context and (ii) are provided for information purposes only.
[1] Source : Datastream, BofA Global Research
[2] Source : Datastream, BofA Global Research
[3] Source : BofA Global Research