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A hot August for the financial markets

Investment Update - September 2024

August was a volatile month on the financial markets. Performance remains in positive territory, however, with global equities gaining 0.44%1 and European equities gaining 1.60%1, while their US counterparts returned just 0.20%1. It should be noted that the US dollar markets rose by almost 2.40%, although the euro’s almost-2% rise against the greenback was detrimental to European investors in US markets.

1Performance calculated in euros

While figures were positive at the end of the month, the start was more turbulent. On 2 August, US employment data showed a rise in the unemployment rate from 4.1% to 4.3%. Historical parallels suggest that this increase could signal the start of a recession, as whenever the three-month moving average of the national unemployment rate has risen by 0.50 percentage points or more relative to its low during the previous 12 months, a recession has begun. Economists refer to this as the “Sahm rule”, after its creator, former Fed economist Claudia Sahm.

Further analysis is needed, however, as in this instance the unemployment rate does not seem to be accompanied by a loss of jobs. Admittedly, the unemployment rate is rising, but that is not linked to a wave of layoffs. In this specific case, the increase is due more to an increase in the participation rate. Since the unemployment rate is simply the number of people officially looking for work relative to the labour force (in other words, it includes people in work and those actively looking for work), an increase in the number of active job-seekers can push up the unemployment rate. This is particularly the case for job-seekers who have recently arrived in the United States, who have not yet had time to find a job. This segment of the population has an unemployment rate of around 10%, which is pushing up the national average.

Meanwhile, to make matters worse, the Bank of Japan raised its key interest rates from 0.10% to 0.25%. The scale of this hike is admittedly not enormous, but the accompanying press release was considered very “hawkish” insofar as the Japanese monetary authority announced that it wanted to continue the normalisation of its monetary policy without too much delay. This led to a wave of panic on global markets, as Japan’s very low interest rates make it an inexpensive source of liquidity. Traditionally, investors borrow in Japanese yen to invest in foreign assets with good yields, particularly US assets. When interest rates are low on the Japanese yen, this is not a problem. However, this communication caused panic among those investors, who reacted quickly by selling their global holdings to convert their funds into yen. The yen rose by almost 10% in just a few days. Fortunately, the Bank of Japan quickly adapted its communication, announcing that it would not act while the markets remained turbulent.

Sovereign bonds naturally performed well during this volatility phase. In the United States, the 10-year yield stood at more than 4.20% at the end of July and ended August at 3.90%. The situation is similar in Germany, where the 10-year sovereign yield fell to 2.20% during the month.

Overall, this volatility phase has left its mark. Although the indices rebounded, investors turned towards more defensive sectors, such as Utilities, Real Estate and Healthcare, rather than Technology, whose valuation may be scaring off some investors, despite still-remarkable earnings growth.

Given this nervousness on the markets, it would seem preferable to adopt a neutral stance on equities pending the outcome of the US election in early November.

In addition to these sectors, we consider it appropriate to add Healthcare, a less volatile sector with more stable results and less sensitive to the economic cycle. 

Geographically, we had overweighted Europe, based on an alignment of the planets a few months ago that is no longer relevant today. Prior to the European elections, there were flows into European funds, and analysts were raising earnings expectations for European companies. Today, this is no longer the case and there is less interest in favouring Europe. 

Lastly, from a bond point of view, the recent dramatic movements have led us to take some profits in order to maintain liquidity to be deployed in a favourable market phase. 

Disclaimer

The recommendations contained in this document are, unless otherwise expressly stated, those of Spuerkeess Asset Management (trading name of BCEE Asset Management S.A.) and are produced by Xavier Hannaerts, Head of Investments & Conducting Officer, Aykut Efe, Economist & Strategist, Boris Stammbach, Portfolio Manager, Loïc Chaulacel, Portfolio Manager, and Enrico D’amicis, Portfolio Manager, acting under an employment contract with Spuerkeess Asset Management.Spuerkeess Asset Management is an entity supervised by the CSSF (Luxembourg’s financial sector supervisory authority) as a UCITS management company and alternative investment fund manager able to provide discretionary portfolio management and investment advisory services.All external sources (financial information systems, Bloomberg and Refinitiv Datastream) are, unless expressly stated in the recommendation itself, deemed reliable, it being understood that Spuerkeess Asset Management cannot, however, fully guarantee the accuracy, completeness or relevance of the information used by these sources. The information may be either incomplete or condensed and cannot be used as the sole basis for valuing securities.The valuation of financial instruments and issuers contained in this document is based on data provided by Bloomberg. The full description of the valuation method used by Bloomberg is available at www.bloomberg.com.

Any reference to past performances should not be construed as an indication of future performances. The price or value of the investments to which this document refers directly or indirectly may vary at any time against your interests. Any investment in financial instruments entails certain risks of which Spuerkeess (Banque et Caisse d’Épargne de l’État, Luxembourg) has been informed beforehand, such as the loss of the investment made.

With a view to providing these recommendations to Spuerkeess, Spuerkeess Asset Management has verified all relationships and circumstances that could reasonably be likely to undermine the objectivity of the recommendations contained in this document and confirms the absence of interests and conflicts of interest relating to any financial instrument or issuer to which the recommendations relate directly or indirectly, as well as those of the persons involved in producing these recommendations.

Recommendations are made on the date indicated on the first page of the document and were first released on the same date. The recommendations contained in this document may, where applicable, be used and therefore updated when Spuerkeess Asset Management next provides investment advice to Spuerkeess.

All recommendations sent by Spuerkeess Asset Management to Spuerkeess over the past twelve months may be consulted directly and free of charge at Spuerkeess Asset Management’s registered office, 6a rue Goethe, L-1637 Luxembourg. The information to be consulted shall include the date of dissemination of the recommendation concerned, the identity of the individual(s) involved in the production of the recommendation, the target price and the relevant market price at the time of dissemination, the direction of the recommendation concerned and the period of validity of the target price or recommendation.

The information contained in this document cannot be used as the sole basis for valuing securities and this document does not constitute an issue prospectus.

This document is for information purposes only and does not constitute an offer or solicitation to buy, sell or subscribe. Spuerkeess Asset Management may not be held liable for any consequences that may result from the use of any of the opinions or information contained in this document. The same is true for any omissions.

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