The equity markets rose again overall last week. An extra boost came on Thursday in particular, following comments by Mario Draghi. The question now is whether this marks the beginning of a traditional year-end rally.
We’re seeing the first glimmer of light in China’s macroeconomic numbers, suggesting a soft landing rather than a destabilising slowdown
Ben Steinebach Head of Investment Strategy
Risks in the investment climate are easing a little now that positive signals are emanating once more from China, and the Fed keeps putting off its first key-rate hike. It’s important to recognise, though, that these risks could flare up again quickly. They were, after all, an important argument for the Fed’s stance in the first place. All the same, we think a year-end rally is a serious possibility and we also remain positive about shares in our general investment vision. First of all, bond yields are at a historical low, which is almost ‘pushing’ investors towards equities. Secondly, the world economy continues to grow at a moderate rate, despite a slowdown in growth in the emerging markets. Which could – thirdly – help company earnings to recover (especially in Europe). Share valuations are not very high, lastly, and certainly not when we look at the low level of inflation and interest rates. It is important therefore for investors to have shares in their portfolio along with a few liquid assets for the sake of flexibility. They will then be in a position to respond if risk factors should move back centre stage (and sooner or later they will).
Encouraging signals from China, lending in Europe is picking up, and the ECB has hinted at further easing
We’re seeing the first glimmer of light in China’s macroeconomic numbers, suggesting a soft landing rather than a destabilising slowdown. Businesses in Europe are finding it easier to get hold of bank credit, which is more than welcome now that the economy is growing and demand for credit increasing. The ECB is worried about persistently low inflation and has dropped some clear hints about further easing. China reported third-quarter growth on Monday of 6.9% year-on-year. That represents a very slight slowdown compared to the 7.0% year-on-year in the second quarter. These figures ought, however, to be taken with a pinch of salt, as monthly activity indicators suggest a somewhat sharper slowdown in growth. The Chinese economy is nevertheless being supported by strong growth in the service sector and by consumer spending, which are almost compensating for the weakness in the industrial sector and the level of investment. Lending also rose, as did the money supply. There were signs that the real estate market is stabilising too; cement prices, for instance, have been rising for three months. We are confident, therefore, that China is heading for a soft landing rather than a destabilising economic slowdown.
The ECB Bank Lending Survey painted a positive picture for the European economy. The terms on which the banks lend to businesses were further relaxed, which means companies can fund their investments more readily. That’s a good thing, because demand for credit is growing significantly, particularly among businesses.
The highlight of the past week, however, was the speech that ECB Chairman Mario Draghi gave on Thursday afternoon. He took a very moderate tone and dropped a clear hint about further quantitative easing in December. Draghi stated, moreover, that a cut in the deposit rate was among the options. The recent appreciation of the euro and the persistently low inflation rate mean that further easing will be needed to achieve the ECB’s 2% inflation target.
Company numbers paint a mixed picture
The preliminary impression given by the corporate results that are now flowing in is that most firms are reporting better than expected earnings but not revenues. There were noteworthy differences between sectors as well. The reporting season is in full swing in the US in particular. The picture painted now that almost a third of American companies have published their third-quarter results is mixed. Based on data gathered by Bloomberg, around 75% of businesses published better than forecast earnings. Fewer than half, by contrast, reported higher than anticipated revenues. More importantly, substantial differences were apparent between sectors. Earnings were down for energy and materials, for instance, but rose in healthcare and in consumer-related sectors. It’s obviously too early in the results season, however, to draw any real conclusions.
Ben Steinebach’s column was written this week by Piet Schimmel.