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In the US, there is a lot of attention on the presidential elections. After the Iowa caucus and New Hampshire primary, it looks like the US is headed for another Trump-Biden showdown, unless the Supreme Court has something to say about it. Indeed, many conservative voices, including former judges, have penned opinions that the former President’s role in the January 6th insurrection ought to disqualify him from standing for Office. Regardless of the outcome, the stock market doesn’t like uncertainty and usually rises following the results. For the time being, investors seem to be in risk-on mode if the recent Bank of America poll, which shows that the US stock optimism is at its highest level since 2021, can be trusted. This enthusiasm is also backed by the US PMI (Purchasing Managers Index) within particular both services and manufacturing strongly up in January and in expansion territory. Inflation, which is closely monitored by just about everyone, seems mitigated. The job market is still healthy. In this context, GDP growth estimates in Q4 2023, came out at a healthy 3.3%, beating consensus and forecast. In the old world, the Euro area barely avoided
a recession with a flat Q4 growth. The inflation figures look similar to the
US, with inflation up (2.9%) and core inflation down (3.4%). Sadly, the
prospects are not encouraging as both the services and manufacturing PMI are in
contraction territory. Other figures such as unemployment and consumer
confidence are not optimistic either. In China, the long overdue liquidation of
Evergrande Group took place, but this may not be the end for the country’s real
estate industry. In fact, a former Chinese central banker thinks the current
property downturn may last for another 2 years and Beijing has asked multiple
regional governments to better support local developers. It is very likely that
Country Garden will be the next real estate giant to shut down. A lot of the
performance this year may be dependent on the magnitude of any government stimulus. Our summary recommendations In our last letter, we warned that geopolitical
risk may be the new focus. While it isn’t the case yet, we should note the less
than reassuring recent developments.
January saw Taiwan elect a pro-west and pro-independence president in defiance
to China.
A US base located in Jordan was attacked by an Iran backed militia, killing 3 soldiers.
This significantly raises the risk of escalation in the Middle East region.
There
are already economic and logistics consequences
following the closing of the Suez Canal, such as Tesla idling
a plant in Germany for 2 weeks due to delivery
delays.
Finally, the stalemate in Ukraine is at risk as Ukraine makes repeated calls
for additional weapons. In light of the developments in January, and the upcoming corporate earnings, it is important to keep a foot in both camps. Having a long position in equities but also protection on the downside via low strike structured products and de-correlated alternative investments. We are maintaining our preference for the US
and relative underweight in Europe and China.
Chart of the month
China Evergrande Group (in red), which was once
the most valuable real estate company in the world, was ordered to liquidate by
a Hong Kong court. It is amongst the biggest corporate bankruptcies in history,
likely second only to Lehman Brothers. At this point, contagion does not seem
to be an issue despite liabilities being over half that of Lehman Brothers at
the time. In green, the path of Country Garden, another crown jewel of Chinese real estate, likely to suffer the same fate as Evergrande. Data source: Bloomberg
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