INVESTMENT NEWS MARCH '24
Economic Growth Surge
US Outlook: Fiscal stimulus propels growth prospects.
What’s happening:
- US economic growth is expected to surpass forecasts, continuing momentum from the previous quarter.
- Enormous fiscal stimulus bolsters the US economy, contrasting with slower recovery in Europe.
- Despite the growth, concerns arise over mounting government debt and persistent inflation challenges.
Learn more:
- February saw remarkable equity gains, particularly for the Nikkei, sustained by a positive profit outlook and favorable metrics.
- Chinese shares present enticing opportunities for high risk investors with attractive valuation metrics.
- Commodity market correction nears end, posing challenges for central banks aiming to control inflation and investors anticipating interest rate cuts.
Further information:
- After the better than expected economic growth in the US in the last quarter of 2023, the Atlanta FED expects that economic growth in the US will again be better than expected in this quarter.
- The US economy continues to benefit from the enormous fiscal stimulus the US government provides.
- Although the US economy grew by $334.5bn in the last quarter of 2023, this was accompanied by an increase in US government debt of $834.2bn.
- Since the last quarter of 2019, the US government has fiscally stimulated the US economy by +25% of GDP. In France, for example, this was “only” +10%.
- The downside of the increasingly better than expected (US) economic growth is that the central banks do not seem to be able to get inflation back below 2% tructurally in 2024 and beyond.
- Because the European economy is recovering slowly, expectations regarding the number of interest rate cuts by central banks in 2024 are decreasing rapidly.
- February was an extremely positive month for equities and the Nikkei in particular.
- The positive for the Japanese Nikkei is that the profit outlook is even better than that for the S&P 500; the price/earnings ratio is 20% lower, and the dividend yield is 0.4% higher.
- With a price/earnings ratio of 8.6, Chinese shares appear attractive for investors with a high risk profile.
- Spreads on high yield and investment grade corporate bonds are now at such low levels that they are hardly attractive anymore.
- Commodities appear to be at the end of a correction in a bull market that began in 2020.
- This would be bad news for both central banks hoping to get inflation below 2% again structurally and for investors counting on many interest rate cuts in 2024.
ECONOMY:
After better-than-expected economic growth in the US in 2023Q4 (+0.8% QoQ), the Atlanta FED expects that growth in the US will also be better than expected in 2024Q1 (est. +0.7% QoQ). Therefore, the question that is increasingly being asked is: where is the long awaited recession? However, there are several comments to be made. For example, there is currently a recession in many of the G7 countries. Although the US economy grew by $334.5 billion (+0.8%) in 2023Q4, this was accompanied by an increase in government debt of $834.2 billion. A multiplier of only 0,40 does not make sense. Only in recessions does spending raise the multiplier above 1.
The +9% economic growth in the US since 2019Q4 has even been accompanied by a fiscal stimulus of +25% of GDP. In France, for example, these figures were “only” +1.8% and +10% respectively. The US economy in general and the US consumers in particular still benefit from these support packages. So, it is undoubtedly true that the US economy is much more resilient than that of the Eurozone, the UK or Japan. Still, the solid economic growth has also mainly been “bought” by the Biden administration. The downside of the consistently better than expected (American) economic growth is that the central banks do not seem to be able to get inflation back below 2% structurally. Because the European economy also appears to be recovering slowly but steadily, expectations regarding interest rate cuts in 2024 have decreased rapidly recently.
Financial Markets
February was an extremely positive month for equities and the Nikkei in particular. For the first time in 30 years, the Nikkei reached a new record high, and the end of the rally does not yet appear to be in sight.
In October last year, we wrote that the risk premium for Japanese equities was more attractive than that for equities in the US. The profit outlook for the Nikkei is still considerably better than that for the S&P 500. Also, the price/earnings ratio is 20% lower, and the dividend yield is 0.4% higher. For the time being, Japanese equities are still undervalued. Chinese equities seem interesting for investors with a high risk profile. There are a lot of negatives to be said about China, but much of the bad news is known and seems more than sufficiently discounted with a price/earnings ratio of 8.6.
Spreads on high yield and investment grade corporate bonds are now so low that they are hardly attractive anymore. On the other hand, commodities appear to be at the end of a correction in a bull market that started in 2020. This would be bad news for both central banks, hoping to get inflation below 2% again structurally, and investors, counting on many interest rate cuts in 2024.
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