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In the US, we still observe a divergence between Manufacturing indicators in contracting territory and Services indicators in expanding territory, while personal spending and GDP figures remain at rather healthy levels. What the fed wants to see is a cooling off of demand, which would naturally decrease inflation and any sign to the contrary is interpreted by investors as a risk the central bank may continue raising rates. This resilient growth could make the Fed intervene more and longer than expected, which could cause the recession that everyone is expecting to be deeper than if it happened in the near future. Residential real estate is proving to be quite resilient given the brutal rise in interest rates. Homeowners seem to have learned their lesson from the 2008 financial crisis and locked in 30-year mortgage loans in the past 3 years when rates were at or close to zero. Therefore, there are very little existing home transactions and new home sales making up a much larger proportion of deals than historically. With the bank lending conditions being so tight, had the loans not been locked in previously, this could have caused a major real estate crisis. However, the existing credit crunch is bound to significantly impact consumption going forward, as savings are drying out and credit card debt maxing out. In Europe, the situation is different. Growth is very close to zero, PMIs’ continue to contract but annual inflation surprised by remaining flat in August (consensus was for a decrease). Logically speaking, in a low growth environment, inflation should be going down. The challenge for the ECB will be to bring inflation in line with target while likely dealing with a recession in early 2024. Emerging markets and China more specifically
made the news with giant home building companies Country Garden close to
defaulting and Evergrande resuming trading and losing 80% in one day (catching
up on one year’s worth of bad news while trading was suspended). The real
estate sector is only part of the problem. China is having to deal with low
economic growth and deflation. At the same time, the rest of the world is
starting to grapple with the fact that China may not continue to drive global
growth to the same extent it has in the past decade. This is not only impacting
China, but the global economy as China is a major importer of various goods
such as food, energy, metals and electronics. Our summary recommendations In a bid to diversify away from public markets,
we continue to build our alternative investment offering. Last month we
mentioned having approved a Private Credit Fund. This month we are approving a Private
Equity Fund on Infrastructure. Our alternatives asset class is now made up of
two income-type of investments (Private Credit and Trade Finance) and two
capital gains-type of investments (Private Equity). This infrastructure fund
will have components from both income and capital gains. At the same time, we are monitoring coupon
levels on our usual low-strike type of structured product.
Chart of the month The chartshows the number of times company transcripts and earnings calls made references to AI. This theme has imposed itself in many discussions, not only in the business world, but in everyday life. It may be the next level in the information revolution. Company Nvidia, in particular, has benefited greatly from the demand in computing resources required to run AI and has had two running quarters of outstanding growth. Source: Bloomberg
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