Tag: Economic scenarios

What is the state of the financial markets today? What are the principles to be observed when investing intelligently? Here is what emerged from J.P. Morgan’s latest report

What should an investor know today to be called ‘smart’? Last week, the S&P 500, the world’s largest stock market index of America’s 500 most capitalised companies, reached a new all-time high, its 46th of this year.

However, although major asset prices tend to be bullish in the long run, steering the markets is still a complicated business. Here are two principles an intelligent investor should know today.

The state of the market

First, however, it may be useful to analyse the state of the stock market. Results in 2024 were decidedly positive because most listed companies exceeded growth expectations. More than three-quarters of the companies exceeded expectations by 6.8% in aggregate. However, a few exceptions came from what many believe to be the most promising sector soon: artificial intelligence. For example, ASML, a leading Dutch semiconductor supply chain company, put pressure on chip stocks on Tuesday after missing earnings and revising its sales forecast 2025.

On the other hand, regarding the bond source, US government bond yields fluctuated throughout last week, then stabilised after releasing two important macroeconomic data: retail sales and unemployment benefit claims. Consequently, the current situation makes us cautiously optimistic about the FOMC meeting on 7 November 2024, after the committee still needs to meet in October. Will the FED and its chairman Jerome Powell cut interest rates again, as happened in September? 

How can we not mention the US elections, scheduled for Tuesday, November 5? It is certainly important to follow what will happen, but it is not fundamental, as we will see by analysing two cardinal principles of the intelligent investor that we have extrapolated from the latest J.P. Morgan report.

Smart investing: the hygiene of your portfolio

The first crucial principle for J.P. Morgan to invest intelligently is portfolio hygiene. This term indicates the identification of clear objectives and the creation and maintenance of a long-term plan, all accompanied by regular ‘check-ups’. What does this mean from a practical point of view? 

To understand this, we can extrapolate an example from the current market situation. Last week, we celebrated the second birthday of the current bull market, at least as far as the stock market is concerned. On 12 October 2022, the S&P 500 touched a low at 3,577 and has since recorded +60%. Although very positive for investors, this upward movement has certainly unbalanced the allocations of those who diversify between different types of assets, e.g., stocks and bonds. Therefore, if one’s strategy provides for it, it may be time to rebalance and stick to one’s plan.

For example, if we look at a 60/40 type portfolio (60% invested in stocks of the S&P 500 and 40% in US bonds), we see that it has had a total return of about 27% over the past year. Without rebalancing, the same portfolio would now be overweighted in stocks at 64% and underweighted in bonds at 36%, given the difference in return between the two asset classes. According to J.P. Morgan, a smart investor periodically takes the time to analyse their financial situation and make adjustments according to their strategy. 

However, the preceding is not mandatory. If your strategy involves periodic investments, perhaps through recurring purchases, but does not involve periodic rebalancing, you can safely proceed without changing allocations. Consider extending your current approach to another innovative and promising market: cryptocurrencies. 

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Understand the risks, but prepare for the opportunities

The second principle of the ‘smart’ investor identified by J.P. Morgan ties in with what was specified at the end of the previous paragraph. In a market often influenced in the short term by macroeconomic and political news and events, it is important to look to the long-term and sound fundamentals. 

Some topics that we have often discussed on our blog, such as the upcoming US presidential election, geopolitical turmoil in the Middle East and monetary policy decisions by central banks, may cause unease or arouse fear. However, they mustn’t affect one’s long-term strategy in any way. In the investment world and when trading in the markets, it is crucial to focus on knowledge, data, and tangible and concrete variables rather than unknowns.

In support of this thesis, J.P. Morgan presents some historical data, which shows that markets tend to rise regardless of the winner (or winner) of presidential elections. The same argument can also be applied to conflicts and central banks’ decisions on interest rates. Since 1950, there have been 18 elections in the US and ten changes in the White House between Democrats and Republicans. Over these 74 years, US GDP growth has averaged 3.2% per year, while that of the S&P 500 has averaged 9.4%. In short, an investor, if intelligent, should take the ball when he starts to doubt his investment strategy due to news or unexpected events and use the moment to re-examine his objectives, plan, and the time horizon of his investments.

In conclusion, according to J.P. Morgan, an intelligent investor does not change his strategy depending on the news or looming events. On the contrary, he constantly monitors the situation but only acts according to his plan and objectives.

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What will the ECB decide at its meeting on 12 September? Will it cut rates by 25 basis points as planned, or will it, surprisingly, leave them unchanged?

What are the forecasts for the next ECB meeting in September 2024? With only a few days to go before the meeting scheduled for the 12th of the month, speculation about a possible interest rate cut is taking centre stage. At its last meeting in July, the European Central Bank had left them unchanged at 4.25% after the June cut. While deposit rates are stuck at 3.75%.

Since then, new scenarios have emerged, in particular a drastic drop in inflation, at least according to the preliminary figure, from 2.6 % to 2.2 %. Moreover, the Federal Reserve, the central bank of the United States, is ready to cut rates for the first time since 2022. What will happen? Lagarde’s press conference will clarify all doubts.

ECB meeting September 2024: interest rate cut forecasts

The most credible forecasts on the ECB meeting in September 2024 and the European Central Bank’s interest rate cut tell us we will likely see a 25 basis point cut. This intervention would be justified by the slowdown in inflation, which is now very close to the 2% target, but also by the worrying downturn in growth. If this is the case, it would be the second cut in the cost of money this year after the June cut.

The European macroeconomic landscape

To explore the matter further, we can quote Carsten Brzeski, global head of macroeconomics at ING, who said on the occasion of the release of the latest inflation figures: ‘With the latest Eurozone inflation figures, a rate cut at the European Central Bank meeting has become almost a done deal’.

Therefore, economists suggest two factors to consider, especially in view of the upcoming ECB meeting in September: the slowdown in inflation and the worrying situation of growth indicators.

For example, the eurozone’s gross domestic product (GDP) grew by only 0.2% in the second quarter of 2024, a downward revision from the previous estimate of 0.3%. At the ECB meeting, there will also be time to review the macroeconomic projections since they were revised in June. 

At that time, annual economic growth in the Eurozone was forecast at 0.9% in 2024, with a further strengthening to 1.4% in 2025 and 1.6% in 2026. Inflation, on the other hand, was expected to decline from 5.4 % in 2023 to 2.5 % in 2024, 2.2 % in 2025 and 1.9 % in 2026.

We continue with the Pacific Investment Management Company (PIMCO) forecast, which believes that the ECB will cut the deposit rate by 25 basis points from 3.75 % to 3.5 % at its meeting on 12 September 2024. The US firm believes that the Governing Council will provide much guidance beyond September and expects it to reiterate a data-dependent strategy.

How many interest rate cuts can we expect in the coming months?

In the current scenario, despite the drastic drop in inflation, leading industry experts continue to expect two interest rate cuts for 2024, both of 25 basis points. Fidelity, a US investment fund that also owns an ETF on Bitcoin, is of this opinion. If Fidelity’s predictions come true, the deposit rate will stand at 3.25% by the end of the year. By 2025, however, three more cuts are expected, bringing interest rates to 3% and the deposit rate to 2.50%.

DWS Group, one of the world’s leading asset managers, is more or less of the same mind: in 2025, rates will be reduced by 25 basis points every quarter until they reach 2.50% in September 2025.

Ulrike Kastens, Senior Analyst at DWS, stated in an interview on 5 September that the ECB Governing Council will want to avoid lowering interest rates too quickly to prevent inflation from rising again. According to Kastens, the elements in favour of a further interest rate cut in October would mainly be two:

•  a larger drop in growth than expected;
•  a larger interest rate cut by the Federal Reserve than expected, expecting a reduction of 25 basis points.

Bastian Freitag, an executive at the Franco-British investment bank Rothschild & Co, does not agree. He expects a plan of regular cuts of 25 basis points from September to December and further quarterly reductions in 2025.

What can we expect at the next ECB meeting in September? Will the predictions on the new interest rate cut come true? How will the Federal Reserve behave at its meeting on September 17 and 18?

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Has the Chinese economic crisis arrived? What will be the influence on countries that have linked their future to China?

After two decades of unprecedented economic growth and prosperity, China has shown signs of a slowdown, causing global concern. How did it get to this point? Was the Chinese economic miracle, which fuelled global growth for years, an illusion? The signs of trouble are many: the collapse of exports from countries like Venezuela, which had staked much of its economic future on Chinese loans in exchange for oil, and the failure of major Beijing-funded infrastructure projects, such as the China-Laos high-speed rail line, which proved unsustainable.

The slowdown in China’s demand for raw materials has thrown emerging and established economies into crisis, with devastating effects even on long-standing economic partners such as Germany. China’s progressively cutting back on foreign lending and imposing unfair competition on global markets have caused many economies to be in trouble, raising questions about the sustainability of the Chinese growth model.

The economic agreement between China and Venezuela

In the 2000s, Venezuela, led by President Hugo Chávez, put all its eggs in China‘s basket, as it was the ideal solution to Venezuela’s problems. How? By offering billions of dollars in investments and loans in exchange for a precious commodity: black gold oil. At first glance, Chavez’s gamble may seem a winner. During economic expansion, China was hungry for energy resources and used Venezuelan oil to fuel its growth while financing ambitious infrastructure projects in Venezuela.

However, during the past decade, the situation worsened, mainly due to the drop in demand for oil and thus its price. Venezuelan export revenues dropped dramatically, plunging an economy already plagued by bad governance and internal problems into crisis, which finally rolled over in 2014. We all know the consequences of this: food shortages, hospitals lacking medicines and crime rates bordering on the surreal. For these reasons, millions of Venezuelans have been forced to emigrate, and China has progressively reduced its funding to the country. In short, Venezuela’s bet on China has become an economic disaster.

This crisis is only one of the first alarm signals ignored by the international community. Dozens of other countries, which have tied their economic fate to Chinese growth, now find themselves in dire financial straits. This situation is mainly due to the slowdown of the Chinese economy.

The Chinese economic ‘miracle’: an illusion?

After the 2008 financial crisis, triggered by the collapse of the US housing market, China supported the global economy by injecting vast amounts of money into the economic system, stimulating domestic demand and investing. It has spent around USD 29 trillion in less than a decade, equivalent to one-third of the world’s Gross Domestic Product (GDP). The beneficial effects of this expansionary policy have been felt worldwide, so much so that the Chinese economy is thought to have contributed around 40% of global growth from 2008 to 2021.

For many developing countries, China was the best of allies. A century later than in the West, its economic boom suddenly opened up new markets for raw material exports, while the Chinese government offered generous loans for infrastructure projects through the Belt and Road Initiative (BRI). However, deep imbalances and structural problems were hidden behind this apparent economic miracle.

The Chinese boom, fuelled by inefficient investments and short-term stimulus policies, now appears unsustainable. The situation is even more difficult if one analyses the moves of President Xi Jinping, who has been in power since 2012, tightened state control over the economy and resisted significant economic reforms. The result? Economic growth is slowing dramatically, so much so that some experts believe it is now practically nil.

The global impact of the Chinese slowdown

The slowdown in Chinese growth is having significant repercussions globally, particularly in countries that have chosen China as their leading trading partner. Falling Chinese demand for raw materials has led to a slump in exports for many emerging economies. The situation worsens as the Chinese government continues to subsidise its own companies and flood global markets with cheap products, making it difficult for local producers in other parts of the world.

In particular, China’s foreign lending has dropped dramatically in recent years. In 2016, China lent around USD 90 billion abroad annually, but today, this figure has fallen to only USD 4 billion. This reduction in financing is putting pressure on many countries that depend on Chinese loans for their infrastructure projects. Many nations are faced with paying off huge debts without being able to count on new loans.

The crises in Zambia, Sri Lanka and Pakistan

To understand the extent of the problem, one only has to look at the situation in Zambia and Sri Lanka. Both have declared default because of billions of dollars in debt to China, which they cannot repay. Or Pakistan, where factories are closing and the energy system is struggling to function.

Even the most developed economies are not immune. Germany saw its exports to China fall by 9% in 2023, the most significant drop since China joined the World Trade Organisation in 2001. Other commodity-rich countries, such as Australia, Brazil, and Saudi Arabia, are seeing declining demand for energy and natural resources.

The shadow of the 1980s debt crisis

The current situation parallels the debt crisis that affected many developing countries in the 1980s. At that time, many nations, particularly in Latin America and Africa, were overwhelmed by huge debts contracted with Western commercial banks and international institutions such as the International Monetary Fund (IMF) and the World Bank. Faced with soaring interest rates and plummeting commodity prices, many countries, including Mexico, Brazil and Argentina, defaulted, triggering years of economic stagnation and political crises.

Today, China has taken over the role that used to be played by Western banks. Its growing economic influence has led many developing countries to take on huge debts to finance infrastructure and industrial projects. However, as the cases of Venezuela, Zambia and Sri Lanka show, the price of this dependence on China can be devastating.

An uncertain future

The Chinese economic crisis is not just about China but has global implications. Dozens of countries are at risk of default, and the global economic outlook is uncertain. The situation could worsen if China does not restructure its external debt and change its protectionist trade practices. Not least because China also has to deal with a severe real estate crisis, for example, the collapse of Evergrande, one of the world’s largest companies in this sector.

The international community faces a complex challenge: finding a balance between the need to involve China in resolving the crisis and protecting its economies from the consequences of the Chinese slowdown. Venezuela’s example shows how high the cost of a badly calibrated economic gamble can be.

The world needs a collective solution to deal with the consequences of the Chinese economic slowdown, but finding a global agreement will take work.

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