June – A month of politics
The month of June had more political events than we are used to (or like to have), but not every market reacted the same way. The most talked about is probably the European Parliament elections, which took a heavy turn to the right, dealing a big blow to the parties in power. As a result, French President Macron took everyone by surprise in dissolving the National Assembly and calling for snap elections (1st round on June 30th). The UK is preparing its’ own general election (July 4th) after the Prime Minister called for it. The US had its’ first tense presidential debate, which was significant enough to potentially change the election landscape. Meanwhile, Bolivia seems to have had an attempted coup, a couple of presidential elections took place (Mexico and Mauritania – both non-events), a couple of high-profile summits took place (G7, Ukraine peace conference) but yielded nothing notable. And the temperature keeps on rising in the Middle East, as Hezbollah and Israel escalate threatening rhetoric.
Data source : Bloomberg
While the US markets added another good month to an already stellar year and volatility stagnated at very low levels, we witnessed what can happen at the individual stock level when a sales/profit warning is issued, or a target not met. Nike tumbled close to -20% in a day, Nvidia took a -13% hit over 2 days, just to name two. Given the very high PE ratio, the day Nvidia really disappoints will be punishing. Overall though, one might be tempted to lock in profits and go on vacation for the rest of the year. There is no foreseeable bad news for the second half of this year. US Inflation and most of its components (with the exception of energy) have resumed their downward trend. The Purchasing Managers’ Index (PMI) remains solid, both for services and manufacturing. Following the first US presidential debate, many are speculating (if not calling for) that the final match up might not be between former President Trump and current President Biden. Probabilities of a Republican sweep have increased, but fear not, economists predict that it would be the best outcome for the stock and bond markets.
European markets fared much worse this month. One might be tempted to attribute it to the uncertainty surrounding the elections. While it may be true for France, the UK which is on the same boat did not suffer nearly as much. The issue with France resides in the national budget and the promises made by the various parties in order to garner votes. Macroeconomic indicators continue to be less optimistic than in the US. PMIs are barely in expansion territory, GDP is marginally positive, unemployment unchanged. Europe also had big movers, such as Airbus which tanked -14%. It would seem logical that Airbus would benefit from Boeing’s woes, but it announced delays due to a lack of supplier capacity. The Swiss National Bank surprised again with another rate cut.
Many fund managers focused on China had predicted that the reforms were over in the country (education in the private sector, monopoly in technology, housing) as the government supposedly didn’t want to erode investor confidence further. Actually, they just proved that they do what they want with a new policy placing a cap on compensation in the financial sector at the equivalent of USD 400K.
Our summary recommendations
Remain vigilant to political changes in the short term by capitalizing on opportunities, but staying invested in the long term is key.
We saw an opportunity in the recent correction on European stock indices by structuring a new low strike product with an interesting coupon.
We stay out of emerging markets equities. And which sector will be directly impacted by policies next is a question we prefer not to think about by staying out of China.
Chart of the month
The chart of the month shows the10-year yields on the French, German and Portuguese government bonds. We mentioned above, the impact of the political turmoil in France on the French stock market, but it is also being reflected in the bond market.
Who remembers the derogatory acronym “PIIGS” (Portugal, Italy, Ireland, Greece, Spain)? 14 years later, Portugal is priced less risky than France over the long term. In fact, the so called PIIGS are now leading the northern European countries in terms of growth.
The widening of the spread between the French and German yields can also be seen increasing.
Data source: Bloomberg
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